HANCOCK WHITNEY CORP - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

 

For the fiscal year ended December 31, 2016.

OR

 

Commission file number 0-13089

Hancock Holding Company

(Exact name of registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐ 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒ 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐ 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒ 

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 22, 2017 was $2.2 billion based upon the closing market price on NASDAQ on June 30, 2016. For purposes of this calculation only, shares held by nonaffiliates are deemed to consist of (a) shares held by all shareholders other than directors and executive officers of the registrant plus (b) shares held by directors and officers as to which beneficial ownership has been disclaimed.

On January 31, 2017, the registrant had 84,259,371 shares of common stock outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for our annual meeting of shareholders to be filed with the Securities and Exchange Commission (“SEC” or “The Commission”) are incorporated by reference into Part III of this Report.



 

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Hancock Holding Company

Form 10-K

Index

 



 



 

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Hancock Holding Company

Glossary of Defined Terms



ALCO – Hancock’s Asset Liability Management Committee

AOCI – accumulated other comprehensive income

ALLL – allowance for loan and lease losses

ASC – Accounting Standards Codification

ATM - automatic teller machine

Bank – Whitney Bank

Basel II - Basel Committee's 2004 Regulatory Capital Framework (Second Accord)

Basel III - Basel Committee's 2010 Regulatory Capital Framework (Third Accord)

Basel Committee - Basel Committee on Banking Supervision

BSA – Bank Secrecy Act

bp(s) – basis point(s)

C&I – commercial and industrial loans

CD – certificate of deposit

CDE – Community Development Entity

CEO – Chief Executive Officer

CET1 – common equity tier 1 capital as defined by Basel III capital rules

CFO – Chief Financial Officer

CFPB – Consumer Finance Protection Bureau

COSO – Committee of Sponsoring Organizations of the Treadway Commission

CMO – Collateralized Mortgage Obligation

Company – Hancock Holding Company and its wholly-owned subsidiaries

CRA – Community Reinvestment Act of 1977

CRE – commercial real estate

DIF – Deposit Insurance Fund

Dodd-Frank Act – The Dodd-Frank Wall Street Reform and Consumer Protection Act

EITF – Emerging Issues Task Force

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

FDICIA – Federal Deposit Insurance Corporation Improvement Act of 1991

Federal Reserve Bank – The 12 banks that are the operating arms of the U.S. central bank. They implement the

policies of the Federal Reserve Board and also conduct economic research.

Federal Reserve Board – The 7-member Board of Governors that oversees the Federal Reserve System, establishes

monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed

by the President subject to Senate confirmation, and serve 14-year terms.

Federal Reserve System – The 12 Federal Reserve Banks, with each one serving member banks in its own district.

This system, supervised by the Federal Reserve Board, has broad regulatory powers over the money supply and the

credit structure.

FFIEC – Federal Financial Institutions Examination Council

FHA – Federal Housing Administration

FHLB – Federal Home Loan Bank

GAAP – Generally Accepted Accounting Principles in the United States of America

HBHC – ticker symbol for Hancock Holding Company

IRS – Internal Revenue Service

LIBOR – London Interbank Offered Rate

LIHTC – Low Income Housing Tax Credit

LTIP – long-term incentive plan

MBS – mortgage-backed securities

MD&A – management’s discussion and analysis of financial condition and results of operations

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MDBCF – Mississippi Department of Banking and Consumer Finance

NAICS – North American Industry Classification System

n/m – not meaningful

NSF – non-sufficient funds

OCI – other comprehensive income

OD - Overdraft

ORE – other real estate

Parent Company – Hancock Holding Company

SEC – U.S. Securities and Exchange Commission

Securities Act – Securities Act of 1933, as amended

Hancock – Hancock Holding Company

Hancock Bank – Whitney Bank does business as Hancock Bank in Mississippi, Alabama, and Florida

Hancock's 2016 Form 10-K – Hancock’s Annual Report on Form 10-K for the year ended December 31, 2016 

TDR – troubled debt restructuring (as defined in ASC 310-40)

USA Patriot – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001

U.S. Treasury – The United States Department of the Treasury

Volcker Rule – section 619 of the Dodd-Frank Act and regulations promulgated thereunder, as applicable

Whitney Bank – wholly-owned subsidiary of Hancock Holding Company, through which Hancock conducts its banking operations

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PART I



ITEM 1.       BUSINESS



ORGANIZATION AND RECENT DEVELOPMENTS



Hancock Holding Company (which we refer to as “Hancock” or the “Company”) is a financial services company that provides a comprehensive network of full-service financial choices to the Gulf South region through its bank subsidiary, Whitney Bank (the “Bank”), a Mississippi state bank. Whitney Bank operates under two century-old brands: “Hancock Bank” in Mississippi, Alabama and Florida and “Whitney Bank” in Louisiana and Texas. Whitney Bank also operates a loan production office in Nashville, Tennessee under both the Hancock and Whitney Bank brands.



Hancock was organized in 1984 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended. In 2002, the Company qualified as a financial holding company, giving it broader powers. The corporate headquarters of the Company is in Gulfport, Mississippi.



Historically, our growth was primarily through internal branch expansions into areas of population that were not served by a dominant financial institution and through several small acquisitions. In 2009, we acquired the assets and assumed the liabilities of Panama City, Florida based Peoples First Community Bank (Peoples First) in a transaction with financial assistance from the Federal Deposit Insurance Corporation (FDIC) adding approximately $2 billion in assets. In 2011, we acquired all of the common stock of Whitney Holding Corporation (Whitney), a bank holding company based in New Orleans, and its wholly-owned subsidiary, Whitney National Bank, adding $11.7 billion in assets, $6.5 billion in loans, and $9.2 billion in deposits. Our growth since the Whitney acquisition has been organic through the expansion of products that are targeted across the Company’s footprint. In the fourth quarter of 2015, we opened a loan production office in Nashville, Tennessee, further expanding our lending footprint.  In the fourth quarter of 2016, we signed an agreement to purchase certain assets and liabilities, including $1.3 billion in loans and nine Louisiana branches, from First NBC Bank (“First NBC”).  The First NBC transaction is expected to close on March 10, 2017.



At December 31, 2016, our balance sheet has grown to $24.0 billion, with loans totaling $16.8 billion, deposits totaling $19.4 billion and 3,724 employees on a full-time equivalent basis.  The First NBC transaction is expected to add approximately $1.3 billion in loans and $0.5 billion in transaction and savings deposits to our balance sheet in the first quarter of 2017.



NATURE OF BUSINESS AND MARKETS



The Bank operates across the Gulf South region comprised of southern Mississippi; southern and central Alabama; southern Louisiana; the northern, central, and panhandle regions of Florida; Houston, Texas; and Nashville, Tennessee. The Bank offers a broad range of traditional and online community banking services to commercial, small business and retail customers, providing a variety of transaction and savings deposit products, treasury management services, investment brokerage services, secured and unsecured loan products (including revolving credit facilities), and letters of credit and similar financial guarantees. The Bank also provides trust and investment management services to retirement plans, corporations and individuals.



We also offer other services through nonbank subsidiaries. Hancock Investment Services, Inc. provides discount investment brokerage services, annuity products, and life insurance. Harrison Finance Company provides consumer financing services. We also have several special purpose subsidiaries to facilitate investment in new market tax credit activities and others that operate and sell certain foreclosed assets. Total revenue from nonbank subsidiaries accounted for less than ten percent of our consolidated revenue in 2016.



During the fourth quarter of 2015, Hancock opened a loan production office in Nashville, Tennessee and purchased approximately $185 million of healthcare loans. This transaction supported our initiative to diversify our loan portfolio and capitalize on opportunities to expand our participation in the healthcare sector across our Gulf South footprint.  The healthcare portfolio continued to grow in 2016 across various sectors of this industry.



Our operating strategy is to provide customers with the financial sophistication and range of products of a regional bank, while successfully retaining the commercial appeal and level of service of a community bank. Hancock’s size and scale enables us to attract and retain high quality employees, whom we refer to as associates, who are focused on executing this strategy.



The main industries in the Gulf Coast are energy and related service industries, military and government-related facilities, educational and medical complexes, petrochemical industries, port facility activities and transportation and related industries, tourism and related service industries, and the gaming industry. As a result of stress in the energy sector, we have been reducing our overall concentration in that industry while continuing to grow in other areas, creating a more diversified portfolio.



Our priorities are growing core revenue in our existing markets, while controlling expenses. We have invested in promoting new and enhanced products that contribute to the goal of diversifying our sources of revenue and increasing core deposit funding.  The First

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NBC transaction will strengthen our position in the greater New Orleans area, where we already hold one of the top market shares.  We will continue to evaluate future acquisition opportunities that have the potential to increase shareholder value, provided overall economic conditions and our capital levels support such a transaction. We remain focused on maintaining two hallmarks of our past culture: a strong balance sheet and a commitment to excellent credit quality.



Additional information regarding the Company and the Bank is available at www.hancockwhitney.com at the link titled Investor Relations.



Loan Production, Underwriting Standards and Credit Review



The Bank’s primary lending focus is to provide commercial, consumer and real estate loans to consumers, to small and middle market businesses, and to corporate clients in the markets served by the Bank. We seek to provide quality loan products that are attractive to the borrower and profitable to the Bank. We look to build strong, profitable client relationships over time and maintain a strong presence and position of influence in the communities we serve. Through our relationship-based approach we have developed a deep knowledge of our customers and the markets in which they operate. The Company continually works to ensure the consistency of its lending processes across our banking footprint, to strengthen the underwriting criteria we employ to evaluate new loans and loan renewals, and to diversify our loan portfolio in terms of type, industry and geographical concentration. We believe that these measures position the Bank to meet the credit needs of businesses and consumers in the markets it serves while it pursues a balanced strategy of loan profitability, growth, and quality.



The following describes the underwriting procedures of the lending function and presents our principal categories of loans. The results of our lending activities and the relative risk of the loan portfolio are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



The Bank has a set of loan policies, underwriting standards and key underwriting functions designed to achieve a consistent lending and credit review approach. Our underwriting standards address:



Additionally, our loan concentration policy sets limits and manages our exposures within specified concentration tolerances, including those to particular borrowers, foreign entities, industries, and property types for commercial real estate. This policy sets standards for portfolio risk management and reporting, the monitoring of large borrower concentration limits and systematic tracking of large commercial loans and our portfolio mix. We continually monitor our concentration of commercial real estate and energy-related loans to ensure the mix is consistent with our risk tolerance. The Company defines concentration as the total of funded and unfunded commitments (excluding loans acquired in the People’s First transaction covered under loss-sharing agreements with the FDIC) as a percentage of total Bank capital (as defined for risk-based capital ratios). The Company had the following portfolio segment concentrations (shown as a percentage of risk-based capital) as of December 31, 2016: 



Portfolio Segment Concentrations



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The following details the more significant industry concentrations for commercial non-real estate and owner occupied real estate included above (shown as a percentage of risk-based capital) as of December 31, 2016:



Significant Industry Concentrations



Our underwriting process is structured to require oversight that is proportional to the size and complexity of the lending relationship. We delegate designated regional managers, relationship managers, and credit officers loan authority that can be utilized to approve credit commitments for a single borrowing relationship. The limit of delegated authority is based upon the experience, skill, and training of the relationship manager or credit officer. Certain types and size of loans and relationships must be approved by either one of the Bank’s centralized underwriting units or the Bank’s executive loan committee.



Loans are underwritten in accordance with the underwriting standards and loan policies of the Bank. Loans are underwritten primarily on the basis of the borrower’s ability to make debt service payments timely, and secondarily on collateral value. Generally, real estate secured loans and mortgage loans are made when the borrower produces evidence of the ability to make debt service timely along with appropriate equity investment in the property. Appropriate and regulatory compliant third party valuations are required at the time of origination for real estate secured loans.



The following briefly describes the composition of our loan portfolio by category.



Commercial and industrial



The Bank offers a variety of commercial loan services to a diversified customer base over a range of industries, including energy, wholesale and retail trade in various durable and nondurable products, manufacturing of such products, marine transportation and maritime construction, financial and professional services, healthcare services, and agricultural production. Commercial and industrial loans are made available to businesses for working capital (including financing of inventory and receivables), business expansion, to facilitate the acquisition of a business, and the purchase of equipment and machinery, including equipment leasing. These loans are underwritten primarily based on the identified cash flows of the borrower and, when secured, have the added strength of the underlying collateral.



Commercial non-real estate loans may be secured by the assets being financed or other business assets such as accounts receivable, inventory, ownership or commodity interests, and may incorporate a personal or corporate guarantee; however, some short-term loans may be made on an unsecured basis, including a small portfolio of corporate credit cards, generally issued as a part of overall customer relationships.  Asset-based loans, such as accounts receivables and commodity interest secured loans, may have limits on borrowing that are based on the collateral values.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

   

The commercial non-real estate loan portfolio includes the majority of our energy-based lending, which totaled $1.4 billion, or 8.4%, of the total loans at December 31, 2016. The Company’s energy portfolio is diversified across a number of sectors, including exploration and production as well as related support services. Industry conditions continue to reflect elevated risk, so we are actively monitoring the health of this segment of the portfolio and have reduced overall concentration.



Commercial real estate – owner occupied loans consist of commercial mortgages on properties where repayment is generally dependent on the cash flow from the ongoing operations and activities of the borrower.  Like commercial non-real estate, these loans

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are primarily made based on the identified cash flows of the borrower, but also have the added strength of the value of underlying real estate collateral.  





Commercial real estate – income producing



Commercial real estate – income producing loans consist of loans secured by commercial mortgages on properties where the loan is made to real estate developers or investors and repayment is dependent on the sale, refinance, or income generated from the operation of the property.  Properties financed include retail, office, multifamily, senior housing, hotel/motel, skilled nursing facilities and other commercial properties. 



Repayment of commercial real estate – income producing loans is generally dependent on the successful operation of the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate – income producing portfolios are diverse in terms of type and geographic location. We monitor and evaluate these loans based on collateral, geography and risk grade criteria. This portfolio has experienced minimal losses in the last few years, however, past experience has shown that commercial real estate conditions can be volatile, so we actively monitor this segment of the portfolio.



Construction and land development



Construction and land development loans are made to facilitate the acquisition, development, improvement and construction of both commercial and residential-purpose properties.  Such loans are made to builders and investors where repayment is expected to be made from the sale, refinance or operation of the property or to businesses to be used in their business operations. 



Acquisition and development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of real estate absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon cost estimates, the amount of sponsor equity investment, and the projected value of the completed project. The Bank monitors the construction process to mitigate or identify risks as they arise. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of construction loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Bank until permanent financing is obtained. These loans are typically closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing to take out the construction loan.



Owner occupied loans for the development and improvements of real property to commercial customers to be used in their business operations are underwritten subject to normal commercial and industrial credit standards and are generally subject to project tracking processes, similar to those required for the non-owner occupied loans.



This portfolio also includes a small amount of residential construction loans and loans secured by raw land not yet under development.



Residential Mortgages



Residential mortgages consist of closed-end loans secured by first liens on 1- 4 family residential properties. The portfolio includes both fixed and adjustable rate loans, although most longer-term, fixed-rate loans originated are sold in the secondary mortgage market.  The sale of fixed-rate mortgage loans allows the Bank to manage the interest rate risks related to such lending operations.



Consumer



Consumer loans include second lien mortgage home loans, home equity lines of credit and nonresidential consumer purpose loans. Nonresidential consumer loans include both direct and indirect loans.   Direct nonresidential consumer loans are made to finance the purchase of personal property, including automobiles, recreational vehicles and boats, and for other personal purposes (secured and unsecured), and deposit account secured loans. Indirect nonresidential loans include automobile financing provided to the consumer through an agreement with automobile dealerships.  Consumer loans also include a small portfolio of credit card receivables issued on the basis of applications received through referrals from the Bank’s branches, online and other marketing efforts.    



The Bank approves consumer loans based on income and financial information submitted by prospective borrowers as well as credit reports collected from various credit agencies. Financial stability and credit history of the borrower are the primary factors the Bank considers in granting such loans. The availability of collateral is also a factor considered in making such loans. Preference is also given to borrowers in the Bank’s primary market areas.



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A small consumer finance portfolio is maintained by Harrison Finance Company, one of our nonbank subsidiaries. The portfolio has a higher credit risk profile than the Bank’s consumer portfolio, but carries a higher yield.



Securities Portfolio



Our investment portfolio primarily consists of U.S. agency debt securities, U.S. agency mortgage-related securities and obligations of states and municipalities classified as available for sale and held to maturity. The Company considers the available for sale portfolio as one of its many sources of liquidity available to fund our operations. Investments are made in accordance with an investment policy approved by the Board Risk Committee.  Company policies generally limit investments to agency securities and municipal securities determined to be investment grade according to an internally generated score, which generally includes a rating of not less than “Baa” or its equivalent by a nationally recognized statistical rating agency.  The investment portfolio is tested under multiple stressed interest rate scenarios, the results of which are used to manage our interest rate risk position. The rate scenarios include regulatory and management agreed upon instantaneous and ramped rate movements that may be up to plus 500 basis points. The combined portfolio has a target effective duration of two to five years.  



We also utilize a significant portion of the securities portfolio to secure certain deposits and other liabilities requiring collateralization. However, to maintain an adequate level of liquidity, we limit the percentage of securities that can be pledged in order to keep a portion of securities available for sale. The securities portfolio can also be pledged to increase our line of credit availability at the Federal Home Loan Bank (FHLB) of Dallas, although we have not had to do so.



The investments subcommittee of the asset/liability committee (ALCO) is responsible for oversight and monitoring and the management of the investment portfolio. The investments subcommittee is also responsible for the development of investment strategies for the consideration and approval of ALCO. Final authority and responsibility for all aspects of the conduct of investment activities rests with the Board Risk Committee, all in accordance with the overall guidance and limitations of the investment policy. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Enterprise Risk Management” for further discussion.



Deposits



The Bank has several programs designed to attract deposit accounts from consumers and businesses at interest rates generally consistent with market conditions. Deposits are the most significant funding source for the Company’s interest-earning assets. Deposits are attracted principally from clients within our retail branch network through the offering of a broad array of deposit products to individuals and businesses, including noninterest-bearing demand deposit accounts, interest-bearing transaction accounts, savings accounts, money market deposit accounts, and time deposit accounts. Terms vary among deposit products with respect to commitment periods, minimum balances, and applicable fees. Interest paid on deposits represents the largest component of our interest expense. Interest rates offered on interest-bearing deposits are determined based on a number of factors, including, but not limited to, (1) interest rates offered in local markets by competitors, (2) current and expected economic conditions, (3) anticipated future interest rates, (4) the expected amount and timing of funding needs, and (5) the availability and cost of alternative funding sources. Deposit flows are controlled by the Bank primarily through pricing, and to a lesser extent, through promotional activities. Management believes that the rates that it offers on deposit accounts are generally competitive with other financial institutions in the Bank’s respective market areas. Client deposits are attractive sources of funding because of their stability and low relative cost. Deposits are regarded as an important part of the overall client relationship.



The Bank also holds deposits of public entities. The Bank’s strategy for acquiring public funds, as with any type of deposit, is determined by ALCO’s funding and liquidity subcommittee while pricing decisions are determined by ALCO’s deposit pricing subcommittee. Typically, many public fund deposits are allocated based upon the rate of interest offered and the ability of a bank to provide collateralization. The Bank can influence the level of its public fund deposits through pricing decisions. Public deposits typically require the pledging of collateral, most commonly marketable securities. This is taken into account when determining the level of interest to be paid on public deposits. The pledging of collateral, monitoring and management reporting represents additional operational requirements for the Bank. Public fund deposits are more volatile because they tend to be price sensitive and have high balances. Public funds are only one of many possible sources of liquidity that the Bank has available to draw upon as part of its liquidity funding strategy as set by ALCO.



Total deposits at December 31, 2016 included $693 million of brokered deposits, or less than 4% of total deposits. Brokered deposits represent funds which the Bank obtains through deposit brokers who sell participations in a given bank deposit account or instrument to one or more investors. These brokered deposits are fully insured by the FDIC because they are participated out by the deposit broker in shares of $250,000 or less. These brokered deposits issuances were approved by ALCO as one component of its funding strategy to support ongoing asset growth until such time as customer deposit growth ultimately replaces the brokered deposits. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), we may continue to accept brokered deposits as long as we are either “well-capitalized” or “adequately-capitalized”. 



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Trust Services



The Bank, through its trust department, offers a full range of trust services on a fee basis. In its trust capacities, the Bank provides investment management services on an agency basis and acts as trustee for pension plans, profit sharing plans, corporate and municipal bond issues, living trusts, life insurance trusts and various other types of trusts created by or for individuals, businesses, and charitable and religious organizations. As of December 31, 2016, the trust department of the Bank had approximately $15.1 billion of assets under administration compared to $15.5 billion as of December 31, 2015.  As of December 31, 2016, administered assets include investment management and investment advisory agency accounts totaling $4.3 billion, corporate trust accounts totaling $3.8 billion, and the remaining balances were personal, employee benefit, estate and other trust accounts.



COMPETITION



The financial services industry is highly competitive in our market area. The principal competitive factors in the markets for deposits and loans are interest rates and fee structures associated with the various products offered. We also compete through the efficiency, quality, and range of services and products we provide, as well as the convenience provided by an extensive network of customer access channels including local branch offices, ATMs, online and mobile banking, and telebanking centers. In attracting deposits and in our lending activities, we generally compete with other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, mutual funds and insurance companies, and other financial institutions.



AVAILABLE INFORMATION



We make available free of charge, on or through our investor relations website www.hancockwhitney.com/investors, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and amendments to such filings, as soon as reasonably practicable after each is electronically filed with, or furnished to, the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The SEC maintains a website that contains the Company’s reports, proxy statements, and the Company’s other SEC filings. The address of the SEC’s website is www.sec.gov. Information appearing on the Company’s website is not part of any report that it files with the SEC.



Also available on our investor relations website are our corporate governance documents, including Corporate Governance Guidelines, Code of Business Ethics for Officers and Associates, Whistleblower Policy, Code of Ethics for Financial Officers, Code of Ethics for Directors and Committee Charting.  These documents are also available in print to any stockholder who requests a copy.



SUPERVISION AND REGULATION



Bank holding companies and banks are extensively regulated under federal and state law.  This discussion is a summary and is qualified in its entirety by reference to the particular statutory and regulatory provisions described below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company or the Bank.



New laws and regulations may alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and in what form new laws and regulations may be adopted or the extent to which the business of the Company and the Bank may be affected thereby.



Supervision, regulation, and examination of the Company, the Bank, and our respective subsidiaries by the Federal Reserve and regulatory agencies, as described herein, are intended primarily for the protection of consumers, bank depositors and the Deposit Insurance Fund of the FDIC, rather than holders of our capital stock. 



Bank Holding Company Regulation



The Company is subject to extensive supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). We are required to file with the Federal Reserve periodic reports and such other information as the Federal Reserve may request.  Ongoing supervision is provided through regular examinations by the Federal Reserve and other means that allow the regulators to gauge management’s ability to identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and regulations. The Federal Reserve may also examine our non-bank subsidiaries. In addition to regulation by the Federal Reserve as a bank holding company, the Company is subject to regulation by the State of Mississippi under its general business corporation laws.

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The Company is registered with the Federal Reserve as a bank holding company and has elected to be treated as a financial holding company under the Bank Holding Company Act. Under Federal Reserve policy and federal law, bank holding companies are expected to act as a source of financial and managerial strength to their bank subsidiaries in situations where additional investments in a troubled bank may not otherwise be warranted.  Bank holding companies generally are limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve determines to be closely related to banking, or managing or controlling banks as to be a proper incident thereto. Bank holding companies are prohibited from acquiring or obtaining control of more than five percent (5%) of the voting interests of any company that engages in activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be properly incident thereto. Examples of activities that the Federal Reserve has determined to be permissible are making, acquiring, brokering, or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance and other insurance products in certain locations; and performing certain insurance underwriting activities. The Bank Holding Company Act does not place geographic limits on permissible non-banking activities of bank holding companies. Even with respect to permissible activities, however, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when the Federal Reserve has reasonable cause to believe that continuation of such activity or control of such subsidiary would pose a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.



The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) substantially revised the statutory restrictions separating banking activities from certain other financial activities, and established a comprehensive framework that permits affiliations among qualified bank holding companies, commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company to engage in a full range of financial activities through a financial holding company. Under the GLB Act, bank holding companies that are “well-capitalized” and “well-managed”, as defined in Federal Reserve Regulation Y, which have and maintain “satisfactory” ratings under the Community Reinvestment Act of 1977, as amended (the “CRA”), and meet certain other conditions, can elect to become “financial holding companies.”  Financial holding companies, like the Company, and their subsidiaries are permitted to acquire or engage in activities such as insurance underwriting, securities underwriting, travel agency activities, a broad range of insurance agency activities, merchant banking, and other activities that the Federal Reserve determines to be financial in nature or complementary thereto. 



The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve or waiver of such prior approval before it: (1) acquires ownership or control of any voting shares of any bank if, after such acquisition, such bank holding company will own or control more than five percent (5%) of the voting shares of such bank, (2) or any of its non-bank subsidiaries acquire all of the assets of a bank, (3) merges with any other bank holding company, or (4) engages in permissible non-banking activities. In reviewing a proposed covered acquisition, among other factors, the Federal Reserve considers a bank holding company’s financial and managerial resources, the competitive effects of the transaction, the future prospects of the companies and banks concerned, and the convenience and needs of the communities to be served. The Federal Reserve also reviews any indebtedness to be incurred by a bank holding company in connection with a proposed acquisition to ensure that the bank holding company can service such indebtedness without adversely affecting its ability to serve as a source of strength to its bank subsidiaries.



The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) permits adequately capitalized and managed bank holding companies to acquire control of banks in any state, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. However, the Riegle-Neal Act further provides that a bank holding company may not, following an interstate acquisition, control more than 10% of nationwide insured deposits or 30% of deposits within any state in which the acquiring bank operates. States have the right to lower the 30% limit, although no states within the Company’s current market area have done so. Additional provisions of the Riegle-Neal Act require that interstate activities conform to the Community Reinvestment Act, which is intended to encourage depository institutions to help address the credit needs of the communities in which they operate, including low-and moderate-income neighborhoods, consistent with safe and sound operations.



Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit, leases or sales of property, or furnishing of services.



Capital Requirements



The Federal Reserve has adopted capital adequacy guidelines for bank holding companies that are particularly important in the Federal Reserve’s evaluation of its overall safety and soundness, and are an important factor considered by the Federal Reserve in evaluating any applications made by such holding company to the Federal Reserve. If regulatory capital falls below minimum guideline levels, a financial holding company may lose its status as a financial holding company and a bank holding company or bank may be subject to dividend restrictions or denied approval to acquire or establish additional banks or non-bank businesses or to open additional facilities.



Beginning January 1, 2015, the Company and the Bank each became subject to rules implementing the Basel III framework, which substantially revised the leverage and risk-based capital requirements applicable to bank holding companies and depository

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institutions. These rules were based on international capital accords of the Basel Committee on Banking Supervision. Among other things, the rules established a new category of capital measure, Common Equity Tier 1 capital (“CET1”). Common Equity Tier 1 capital is predominantly comprised of common stock instruments (including related surplus) and retained earnings, net of treasury stock, and after making required capital deductions and adjustments. Tier 1 capital generally is limited to all Common Equity Tier 1 capital plus qualifying minority interests (issued by consolidated depository institutions or foreign bank subsidiaries), accounts of consolidated subsidiaries and an amount of qualifying perpetual preferred stock, limited to 50% of Tier 1 capital. In calculating Common Equity Tier 1 capital and Tier 1 capital, net operating loss and tax credit carryforwards, and goodwill are deducted from stockholders’ equity. Tier 2 capital is a secondary component of risk-based capital, consisting primarily of that portion of perpetual preferred stock that may not be included as Tier 1 capital, mandatory convertible securities, certain types of subordinated debt and a portion of the allowance for loan losses (limited to 1.25% of risk weighted assets).



The rules required the following initial minimum capital ratios as of January 1, 2015:





Additionally, the rules introduced a capital conservation buffer, composed entirely of Common Equity Tier 1 capital, with respect to each of the Common Equity Tier 1, Tier 1 Risk-based and Total Risk-based capital ratios, which provide for capital levels that exceed the minimum risk-based capital requirements. The capital conservation buffer must be maintained by the holding company to avoid limitations on its capital distributions and on its ability to pay discretionary bonus payments to executive officers. The capital conservation buffer was phased in beginning in 2016, with full implementation to 2.50% by 2019.



There are two measures of regulatory capital applicable to holding companies (1) leverage capital ratio and (2) risk-based capital ratios. The essential difference between the leverage capital ratio and the risk-based capital ratios is that the latter measures capital against both balance sheet and off-balance sheet risks that are both identified and risk-weighted.



Additionally, there are deductions and adjustments to capital for other intangibles as well as deductions and adjustments to CET1 by the amount that the carrying value of certain assets exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Examples of these assets are certain deferred tax assets, mortgage servicing rights, significant investments in unconsolidated subsidiaries, investments in certain capital instruments of financial entities and unrealized gains on cash flow hedges included in accumulated other comprehensive income (“AOCI”) arising from hedges not carried at fair market value on the balance sheet. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a three-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter until fully phased-in at January 1, 2018).  The rules also preclude companies the size of the Company from counting certain hybrid securities, such as trust preferred securities, as Tier 1 capital after January 1, 2016. 



The rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to take into account off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under the risk-based capital guidelines, assets are assigned to one of several risk categories, ranging from 0% to 1,250%, though the Company does not have any assets assigned to a risk category over 150%.   For example, U.S. Treasury securities are assigned to the 0% risk category while most categories of loans are assigned to the 100% risk category. Off-balance sheet exposures such as unfunded commitments and standby letters of credit are risk-weighted and all or a portion thereof are included in risk-weighted assets based on an assessment of the relative risks that they present. The risk-weighted asset base is equal to the sum of the aggregate dollar values of assets and off-balance sheet items in each risk category, multiplied by the weight assigned to that category.



A financial holding company that becomes aware that it or a subsidiary bank has ceased to be well capitalized or well managed must notify the Federal Reserve and enter into an agreement to cure the identified deficiency within a specified time period. If the deficiency is not cured timely, the Federal Reserve Board may order the financial holding company to divest its banking operations. Alternatively, to avoid divestiture, a financial holding company may cease to engage in the financial holding company activities that are unrelated to banking or otherwise impermissible for a bank holding company.



The new rules also gave some banks, including ours, a one-time “opt out” in which banks could exclude certain volatile AOCI components from inclusion in regulatory capital. The Bank exercised its AOCI opt-out election option on the Bank’s Call Report and the Company’s FR Y-9C filed as of March 31, 2015.



As of December 31, 2016 and throughout 2016, the Company and the Bank were considered well-capitalized institutions by regulatory agencies. An institution is deemed to be well-capitalized if it is not subject to regulatory order, agreement or directive to meet and maintain a specified capital level for any capital measure, and, in the case of the Bank, exceeds the well-capitalized minimum

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requirement under the FDIC’s Prompt Corrective Action definition.  Leverage capital ratio and risk-based capital ratios as of December 31, 2016, under currently applicable capital adequacy rules for the Company and the Bank were as follows. 







*Applies to Bank



When fully phased in on January 1, 2019, the U.S. Basel III capital rules will require the Company and the Bank to maintain (i) a minimum ratio of CET1 to risk-weighted assets of 7% (4.5% attributable to CET1 plus the 2.5% capital conservation buffer); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 8.5% (6.0% attributable to Tier 1 capital plus the 2.5% capital conservation buffer), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 10.5% (8.0% attributable to Total capital plus the 2.5% capital conservation buffer) and (iv) a minimum leverage ratio of 4%.



Payment of Dividends



The Parent Company is a legal entity separate and distinct from the Bank and other subsidiaries.  Our primary source of cash, other than securities offerings, is dividends from the Bank.  Bank dividends require prior approval of the FDIC if the total of all dividends declared in any calendar year will exceed the sum of net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus.  Federal law also prohibits the Bank from paying dividends that would be greater than undivided profits after deducting statutory bad debts in excess of the allowance for possible loan losses.  Under the Federal Deposit Insurance Act, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC.  The payment of dividends by the bank may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has formal and informal policies which provide that insured banks should generally pay dividends only out of current operating earnings.



Under a Federal Reserve policy adopted in 2009, the board of directors of a bank holding company must consider certain factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:



Stress Testing



The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) requires annual, company-run stress tests of bank holding companies and banks, such as the Company and the Bank, that have more than $10 billion but less than $50 billion of consolidated assets.  Stress tests analyze the potential impact of baseline, adverse, and severely adverse economic scenarios specified by the Federal Reserve for the Company and by the FDIC for the Bank.  The impact of these scenarios is measured against the consolidated earnings, balance sheet and capital of a bank holding company or depository institution over a designated planning horizon of nine quarters, taking into account the organization’s current condition, risks, exposures, strategies, and activities, and such factors as the regulators may request of a specific organization.



Each banking organization’s board of directors and senior management are required to approve and review the policies and procedures of their stress-testing processes as frequently as economic conditions or the condition of the organization may warrant, and at least

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annually. They are also required to consider the results of the stress test in the normal course of business, including the banking organization’s capital planning (including dividends and share buybacks), assessment of capital adequacy and maintaining capital consistent with its risks, and risk management practices. The results of the stress tests are provided to the applicable federal banking agencies. Public disclosure of annual stress test results for the Company began in 2015.



Bank Regulation



The operation of the Bank is subject to state and federal statutes applicable to state banks and the regulations of the Federal Reserve, the FDIC and the Consumer Financial Protection Bureau (“CFPB”). The operations of the Bank may also be subject to applicable Office of the Comptroller of the Currency (“OCC”) regulation to the extent state banks are granted parity with national banks. Such statutes and regulations relate to, among other things, required reserves, investments, loans, mergers and consolidations, issuances of securities, payments of dividends, establishment of branches, consumer protection and other aspects of the Bank’s operations. Violations of laws and regulations, or other unsafe and unsound practices, may result in these agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions.  Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank holding company.



Safety and Soundness.  The Federal Deposit Insurance Act requires the federal prudential bank regulatory agencies, such as the FDIC, to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.



Examinations. The Bank is subject to regulation, reporting, and periodic examinations by the FDIC, the Mississippi Department of Banking and Consumer Finance (the “MDBCF”), and the CFPB. These regulatory authorities routinely examine the Bank’s reserves, loan and investment quality, consumer compliance, management policies, procedures and practices and other aspects of operations. The FDIC has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) rating system and assigns each financial institution a confidential composite rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations, including Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk, as well as the quality of risk management practices. 



Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements.  FDICIA establishes five regulatory capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.”  A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.  FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified.



FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized.  Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan for approval within 90 days of becoming undercapitalized.  For a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan.  The aggregate liability of the parent holding company is limited to the lesser of 5% of the depository institution’s total assets at the time it became undercapitalized and the amount necessary to bring the institution into compliance with applicable capital standards.  If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.  If the controlling holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the federal Bankruptcy Code, the claim for such liability would be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.  In addition, an undercapitalized institution is subject to increased monitoring and asset growth restrictions and is required to obtain prior regulatory approval for acquisitions, new lines of business, and branching.  Such an institution also is barred from soliciting, taking or rolling over brokered deposits. 



Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.  Critically undercapitalized institutions are subject to the appointment of a receiver or conservator within

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90 days of becoming significantly undercapitalized, except under limited circumstances.  The Bank was well capitalized at December 31, 2016, and brokered deposits are not restricted.



Consumer Protection. The Dodd-Frank Act established the CFPB,  an independent regulatory authority housed within the Federal Reserve having centralized authority, including examination and enforcement authority, for consumer protection in the banking industry.  The CFPB has rule writing, examination, and enforcement authority with regard to the Bank’s (and the Company’s) compliance with a wide array of consumer financial protection laws, including the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the S.A.F.E. Mortgage Licensing Act, the Fair Credit Reporting Act (except Sections 615(e) and 628), the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act (sections 502 through 509 relating to privacy), among others. The CFPB has broad authority to enforce a prohibition on unfair, deceptive, or abusive acts and practice.  The Bank is subject to direct supervision and examination by the CFPB in respect of the foregoing consumer protection acts and regulations because the Bank’s total assets are over $10 billion as of December 31, 2016.



In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.



Branching. The Dodd-Frank Act authorizes national and state banks to establish de novo branches in other states to the same extent a bank chartered in those states would be so permitted.



Deposit Insurance Assessments. The Deposit Insurance Fund (“DIF”) of the FDIC insures the deposits of the Bank generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.  The FDIC charges insured depository institutions premiums to maintain the DIF.  Deposit insurance assessments are based on average total assets minus average tangible equity.  For larger institutions, such as the Bank, the FDIC uses a performance score and a loss-severity score to calculate an initial assessment.   In calculating these scores, the FDIC uses a bank’s capital level and supervisory ratings (its “CAMELS ratings”) and certain financial measures to assess the institution’s ability to withstand asset-related stress and funding-related stress.  The FDIC has the ability to make discretionary adjustments to the total score based upon significant risk factors that are not adequately captured in the calculations.



In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act.  In August 2016, the FDIC announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016.  As a result, beginning in the third quarter of 2016, the range of initial assessment rates for all institutions were adjusted downward such that the initial annual base deposit insurance assessment rate ranges from 3 to 30 basis points.  After the effect of potential base-rate adjustments, the total annual base assessment rate could range from 1.5 to 40 basis points.  In March 2016, the FDIC adopted a final rule to increase the reserve ratio for the DIF to 1.35% of total insured deposits.  The rule imposes a surcharge of 4.5 basis points on the excess of the depository institution’s assessment base over $10 billion until the earlier of the quarter that the reserve ratio first reaches or exceeds 1.35% and December 31, 2018.



Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.  The Bank does not believe that it is taking or is subject to any action, condition or violation that could lead to termination of its deposit insurance.





Insider Transactions. In addition to regulating capital, the FDIC has broad authority to prevent the development or continuance of unsafe or unsound banking practices. Pursuant to this authority, the FDIC has adopted regulations that restrict preferential loans and loan amounts to “affiliates” and “insiders” of banks, require banks to keep information on loans to major shareholders and executive officers and bar certain director and officer interlocks between financial institutions.



Mergers, Subsidiaries. The FDIC is also authorized to approve mergers, consolidations and assumption of deposit liability transactions between insured banks and between insured banks and uninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continuing or assumed bank is an insured nonmember state bank. The GLB Act permits national banks, and through state parity statutes, state banks, to engage in expanded activities through the formation of financial subsidiaries. Generally, a state bank may have a subsidiary engaged in any activity authorized for state banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, each of which may only be conducted through a subsidiary of a financial holding company. A state bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be “well-capitalized” and “well-managed.” The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank’s total assets, or $50 billion. A state bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the financial subsidiary

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may not be consolidated with the bank’s assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.



Reserves. Although the Bank is not a member of the Federal Reserve, it is subject to Federal Reserve regulations that require the Bank to maintain reserves against transaction accounts (primarily checking accounts).



Anti-Money Laundering.  The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies “know your customer” requirements that obligate financial institutions to take actions to verify the identity of the account holders in connection with opening an account at any U.S. financial institution.  Banking regulators will consider compliance with the Act’s money laundering provisions in acting upon acquisition and merger proposals.  Sanctions for violations of the Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to $1 million. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA PATRIOT”) Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. The USA PATRIOT Act requires financial institutions to establish anti-money laundering programs with minimum standards that include:





Bank regulators routinely examine institutions for compliance with these anti-money laundering obligations and recently have been active in imposing “cease and desist” and other regulatory orders and money penalty sanctions against institutions found to be in violation of these requirements.  In addition, the Financial Crimes Enforcement Network has recently adopted new regulations that require financial institutions to obtain beneficial ownership information for certain accounts.



Economic Sanctions. The Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress.  OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons List.  If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or freezing the account or transaction requested, and we must notify the appropriate authorities.



Mortgage Rules. Pursuant to rules adopted by the CFPB, banks that make residential mortgage loans are required to make a good faith determination that a borrower has the ability to repay a mortgage loan prior to extending such credit, require that certain mortgage loans contain escrow payments, obtain new appraisals under certain circumstances, and follow specific rules regarding the compensation of loan originators and the servicing of residential mortgage loans.



Risk-retention rules. Banks that sponsor the securitization of asset-backed securities and residential-mortgage backed securities are required to retain 5% of any loan they sell or securitize, except for mortgages that meet low-risk standards.



Limitation on federal preemption. Limitations have been imposed on the ability of national bank regulators to preempt state law. Formerly, the national bank and federal thrift regulators possessed preemption powers with regard to transactions, operating subsidiaries and general civil enforcement authority. These preemption requirements have been limited by the Dodd-Frank Act, which will likely impact state banks by limiting the future scope of approval of activities that would otherwise be subject to the approval of the OCC.



Volcker Rule. In December 2013, the Federal Reserve, the FDIC, and other regulators jointly issued final rules implementing requirements of a new Section 13 to the Bank Holding Company Act, commonly referred to as the “Volcker Rule.” The Volcker Rule generally prohibits us and our subsidiaries from (i) engaging in proprietary trading for our own account, and (ii) acquiring or retaining an ownership interest in or sponsoring a “covered fund,” all subject to certain exceptions. The Volcker Rule also specifies certain limited activities in which we and our subsidiaries may continue to engage, and required us to implement a compliance program. The Federal Reserve extended the conformance deadline to July 21, 2017 for certain legacy “covered funds” activities and investments in place before December 31, 2013.



Transactions with affiliates. There are various restrictions that limit the ability of the Bank to finance, pay dividends or otherwise supply funds to the Company or other affiliates. In addition, subsidiary banks of holding companies are subject to certain restrictions under Section 23A and B of the Federal Reserve Act on any extension of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower.



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Debit Interchange Fees. Interchange fees, or “swipe” fees, are fees that merchants pay to credit card companies and card-issuing banks such as the Bank for processing electronic payment transactions on their behalf. The maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, subject to an upward adjustment of 1 cent if an issuer certifies that it has implemented policies and procedures reasonably designed to achieve the fraud-prevention standards set forth by the Federal Reserve. In addition, the legislation prohibits card issuers and networks from entering into arrangements requiring that debit card transactions be processed on a single network or only two affiliated networks, and allows merchants to determine transaction routing.



Nonbanking Subsidiaries



The Company’s and Bank’s nonbanking subsidiaries are also subject to a variety of state and federal laws. For example, Hancock Insurance Agency is subject to the insurance laws and regulations of the states in which it is active; Hancock Investment Services, Inc. is subject to supervision and regulation by the SEC and the State of Mississippi; and Harrison Finance Company is regulated by the State of Mississippi, including the Mississippi Department of Banking and Consumer Finance.



Compensation



In June 2010, the federal banking agencies issued joint guidance on executive compensation designed to help ensure that a banking organization’s incentive compensation policies do not encourage imprudent risk taking and are consistent with the safety and soundness of the organization. In addition, in June 2012, the Commission issued final rules to implement the Dodd-Frank Act’s requirement that the Commission direct the national securities exchanges to adopt certain listing standards related to the compensation committee of a company’s board of directors as well as its compensation advisers.



In 2016, the Federal Reserve, FDIC and SEC have also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping.  As of December 31, 2016, these rules had not been implemented.



Accounting and Controls



The Company is also required to file certain reports with, and otherwise comply with the rules and regulations of, the SEC under federal securities laws.   For example, we are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board, and Nasdaq.  In particular, we are required to include management and independent registered public accounting firm reports on internal controls as part of our Annual Report on Form 10‑K in order to comply with Section 404 of the Sarbanes-Oxley Act.  We have evaluated our controls, including compliance with the SEC rules on internal controls, and have and expect to continue to spend significant amounts of time and money on compliance with these rules.  Our failure to comply with these internal control rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, and the values of our securities.  The assessments of our financial reporting controls as of December 31, 2016 are included in this report under Item 9A. Controls and Procedures.



Corporate Governance



The Dodd-Frank Act addresses many investor protection, corporate governance, and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (1) grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for Compensation Committee members; and (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers.



Effect of Governmental Monetary and Fiscal Policies



The difference between the interest rate paid on deposits and other borrowings and the interest rate received on loans and securities comprises most of a bank’s earnings. In order to mitigate the interest rate risk inherent in the industry, the banking business is becoming increasingly dependent on the generation of fee and service charge revenue.



The earnings and growth of a bank will be affected by both general economic conditions and the monetary and fiscal policy of the U.S. government and its agencies, particularly the Federal Reserve. The Federal Reserve sets national monetary policy such as seeking to curb inflation and combat recession. This is accomplished by its open-market operations in U.S. government securities, adjustments in the amount of reserves that financial institutions are required to maintain and adjustments to the discount rates on borrowings and target rates for federal funds transactions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates on loans and deposits. The nature and timing of any future changes in monetary policies and their potential impact on the Company cannot be predicted.



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EXECUTIVE OFFICERS OF THE REGISTRANT



The names, ages, positions and business experience of our executive officers as of February 24, 2017:







 

ITEM 1A.    RISK FACTORS



We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by the factors described below.



While we describe each risk separately, some of these risks are interrelated and certain risks could trigger the applicability of other risks described below. Also, the risks and uncertainties described below are not the only ones that we may face. Additional risks and uncertainties not presently known to us, or that we currently do not consider significant, could also potentially impair, and have a material adverse effect on our business, results of operations, and financial condition.



Risks Related to Economic and Market Conditions



We may be vulnerable to certain sectors of the economy and to economic conditions both generally and locally across the specific markets in which we operate.



A substantial portion of our loan portfolio is secured by real estate. While the commercial real estate markets are stable throughout much of the Gulf South, the real estate markets for residential properties have been mixed. In weak economies, or in areas where real estate market conditions are distressed, we may experience a higher than normal level of nonperforming real estate loans, the collateral value of the portfolio and the revenue stream from those loans could come under stress, and additional provisions for the allowance for loan and lease losses could be necessitated. Our ability to dispose of foreclosed real estate at prices at or above the respective carrying values could also be impaired, causing additional losses.



The energy sector of the economy experienced a modest increase in drilling activity and demand over the prior year, however, remains under stress.  The stress on this industry has affected the performance of our energy loan portfolio and is expected to continue to have such effects for the foreseeable future. As of December 31, 2016, energy or energy-related loans comprised approximately 8.4% of our loan portfolio. Given the importance of the energy industry to the overall economies of Texas and Louisiana, two of our core markets, the performance of other business and commercial segments in these markets may become adversely affected when the energy sector is under stress.



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Our financial performance may also be adversely affected by other macroeconomic factors that affect the U.S. economy. The economic recovery has been steady but slow and new uncertainty exists with the possibility of a significant fiscal policy shift on the horizon.  The effects of fiscal policy change will depend on the timing, magnitude, and composition of the policies, the extent to which the policies boost aggregate supply relative to aggregate demand, the cyclical position of the economy, and the responses of the dollar and longer-term interest rates, given the fragile global economic environment.  Moreover, volatility in global financial markets may have a spillover effect that would ultimately impair the performance of the U.S. economy. Additionally, because our operations are concentrated in the Gulf South region of the U.S., unfavorable economic conditions in that market could significantly affect the demand for our loans and other products, the ability of borrowers to repay loans and the value of collateral securing loans.



Certain changes in interest rates, mortgage origination, inflation, deflation, or the financial markets could affect our results of operations, demand for our products and our ability to deliver products efficiently.



Our assets and liabilities are primarily monetary in nature and we are subject to significant risks tied to changes in interest rates that are highly sensitive to many factors that are beyond our control. Our ability to operate profitably is largely dependent upon net interest income. Net interest income is the primary component of our earnings and is affected by both local external factors such as economic conditions in the Gulf South and local competition for loans and deposits, as well as broader influences such as federal monetary policy and market interest rates. Unexpected movement in interest rates markedly changing the slope of the current yield curve could cause our net interest margins to decrease, subsequently reducing net interest income. In addition, such changes could adversely affect the valuation of our assets and liabilities.



In an attempt to help the overall economy, the Federal Reserve Board has kept interest rates low through its targeted Fed Funds rate.  In December 2016, the Federal Reserve Board increased the Fed Funds rate by 25 basis points and could increase rates further during 2017, subject to economic conditions.  As the Federal Reserve Board increases the Fed Funds rate, overall interest rates will likely rise, which may negatively impact the U.S. economic recovery.  Further, changes in monetary policy, including changes in interest rates, could influence (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits, (iv) the fair value of our assets and liabilities, and (v) the reinvestment risk associated with a reduced duration of our mortgage-backed securities portfolio as borrowers refinance to reduce borrowing costs.  When interest-bearing liabilities reprice or mature more quickly than interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income. 



In addition, loan originations, and potentially loan revenues, could be adversely impacted by sharply rising interest rates. If market rates of interest were to increase, it would increase debt service requirements for some of our borrowers; adversely affect those borrowers’ ability to pay as contractually obligated; potentially reduce loan demand or result in additional delinquencies or charge-offs; and increase the cost of our deposits, which are a primary source of funding.



We are also subject to the following risks:



The fair market value of our securities portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.



Although management believes it has implemented an effective asset and liability management strategy to manage the potential effects of changes in interest rates, including the use of adjustable rate and/or short-term assets, and FHLB advances or longer term repurchase agreements, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of our operation and/or our strategies may not always be successful in managing the risk associated with changes in interest rates.



The financial soundness and stability of other financial institutions could adversely affect us.



Our ability to engage in routine funding transactions could be adversely affected by the actions and financial soundness and stability of other financial institutions as a result of credit, trading, clearing or other relationships between such institutions. We routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks and other

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institutional clients. As a result, defaults by, and even rumors regarding, other financial institutions, or the financial services industry generally, could impair our ability to effect such transactions and could lead to losses or defaults by us. In addition, a number of our transactions expose us to credit risk in the event of default of a counterparty or client. Additionally, our credit risk may be increased if the collateral we hold in connection with such transactions cannot be realized or can only be liquidated at prices that are not sufficient to cover the full amount of our financial exposure. Any such losses could have a material adverse effect on our financial condition and results of operations.



Changes in the policies of monetary authorities and other government action could adversely affect our profitability.



Our financial performance is affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market transactions in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, we cannot predict the potential impact of future changes in interest rates, deposit levels, and loan demand on our business and earnings. Furthermore, the actions of the U.S. government and other governments may result in currency fluctuations, exchange controls, market disruption, material decreases in the values of certain of our financial assets and other adverse effects.



Future tax law and regulatory changes could adversely affect our financial condition and results of operations.



Future changes in the tax laws could significantly impact our income tax expense, deferred tax asset balance, and the amount of taxes payable. Current proposals to decrease the federal statutory tax rate, if enacted, could result in a decrease to our deferred tax asset with a corresponding non-cash increase to income tax expense or a decrease to capital that could be material. We may also be adversely impacted by modifications or adjustments in the determination of taxable income or utilization of tax credits.



Governmental responses to market disruptions may be inadequate and may have unintended consequences.



Although Congress and financial regulators continue to implement measures designed to assure greater stability in the financial markets, the overall impact of these efforts on the financial markets is unclear. In addition, the Dodd-Frank Act has resulted in significant changes to the banking industry as a whole which could adversely affect our business.



We compete with a number of financial services companies that are not subject to the same degree of regulatory oversight. The impact of the existing regulatory framework and any future changes to it could negatively affect our ability to compete with these institutions, which could have a material adverse effect on our results of operations and prospects.



The beginning of 2017 has seen significant market volatility driven, in part, by reactions relating to results of the 2016 national elections.  The continued impact of this issue could adversely affect the U.S. or global economies, with direct or indirect impacts on the Company and its business.  Results could include drops in consumer and business confidence, credit deterioration, diminished capital markets activity, and delays in the Federal Reserve Board increases in interest rates.



We may need to rely on the financial markets to provide needed capital.



Our common stock is listed and traded on the NASDAQ Global Select Market. If our capital resources prove in the future to be inadequate to meet our capital requirements, we may need to raise additional debt or equity capital. If conditions in the capital markets are not favorable, we may be constrained in raising capital. We maintain a consistent analyst following; therefore, downgrades in our prospects by one or more of our analysts may cause our stock price to fall and significantly limit our ability to access the markets for additional capital requirements. An inability to raise additional capital on acceptable terms when and if needed could have a material adverse effect on our business, financial condition or results of operations.



The interest rates that we pay on our securities are also influenced by, among other things, the credit ratings that we, our affiliates and/or our securities receive from recognized rating agencies. Our credit ratings are based on a number of factors, including our financial strength and some factors not entirely within our control such as conditions affecting the financial services industry generally, and remain subject to change at any time. A downgrade to the credit rating of us or our affiliates could affect our ability to access the capital markets, increase our borrowing cost and negatively impact our profitability. A downgrade to us, our affiliates or our securities could create obligations or liabilities to us under the terms of our outstanding securities that could increase our costs or otherwise have a negative effect on our results of operations or financial condition. Additionally, a downgrade to the credit rating of any particular security issued by us or our affiliates could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.



Because our decision to incur debt and issue securities in future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future. In addition, geopolitical and

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worldwide market conditions may cause disruption or volatility in the U.S. equity and debt markets, which could hinder our ability to issue debt and equity securities in the future on favorable terms.



Risks Related to the Financial Services Industry



We must maintain adequate sources of funding and liquidity.



Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to support our operations and fund outstanding liabilities, as well as meet regulatory requirements. Our access to sources of liquidity in amounts adequate to fund our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include an economic downturn that affects the geographic markets in which our loans and operations are concentrated, or any material deterioration of the credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors and the loss of deposits to alternative investments. Although we have historically been successful in replacing maturing deposits and advances as necessary, we might not be able to duplicate that success in the future, especially if a large number of our depositors were to withdraw their amounts on deposit. A failure to maintain an adequate level of liquidity could materially and adversely affect our business, financial condition and results of operations.



We may rely on the mortgage secondary market from time to time to provide liquidity.



From time to time, we have sold to certain agencies certain types of mortgage loans that meet their conforming loan requirements in order to reduce our interest rate risk and provide liquidity. There is a risk that these agencies will limit or discontinue their purchases of loans that are conforming due to capital constraints, a change in the criteria for conforming loans or other factors. Additionally, various proposals have been made to reform the U.S. residential mortgage finance market, including the role of the agencies. The exact effects of any such reforms are not yet known, but may limit our ability to sell conforming loans to the agencies. If we are unable to continue to sell conforming loans to the agencies, our ability to fund, and thus originate, additional mortgage loans may be adversely affected, which would in turn adversely affect our results of operations.



Greater loan losses than expected may adversely affect our earnings.



We are exposed to the risk that our borrowers will be unable to repay their loans in accordance with their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit risk is inherent in our business and any material level of credit failure could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio relates principally to the creditworthiness of our corporate borrowers and the value of the real estate pledged as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio will depend on the general creditworthiness of businesses and individuals within our local markets. Our credit risk with respect to our energy loan portfolio is subject to commodity pricing that is determined by factors outside of our control.



We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for estimated loan losses based on a number of factors. This process requires difficult, subjective and complex judgments, including analysis of economic or market conditions that might impair the ability of borrowers to repay their loans. If our assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. We may have to increase our allowance in the future in response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio. Losses in excess of the existing allowance or any provisions for loan losses taken to increase the allowance will reduce our net income and could materially adversely affect our financial condition and results of operations. Future provisions for loan losses may vary materially from the amounts of past provisions.



We depend on the accuracy and completeness of information about clients and counterparties.



In deciding whether to extend credit or enter into other transactions with clients and counterparties, we rely in substantial part on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors if made available. If this information is inaccurate, we may be subject to loan defaults, financial losses, regulatory action, reputational harm or other adverse effects with respect to our business, financial condition and results of operations.



We are subject to a variety of risks in connection with any sale of loans we may conduct.



From time to time we may sell all or a portion of one of more loan portfolios, and in connection therewith we may make certain representations and warranties to the purchaser concerning the loans sold and the procedures under which those loans have been originated and serviced. If any of these representations and warranties are incorrect, we may be required to indemnify the purchaser

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for any related losses, or we may be required to repurchase part or all of the affected loans. We may also be required to repurchase loans as a result of borrower fraud or in the event of early payment default by the borrower on a loan we have sold. If we are required to make any indemnity payments or repurchases and do not have a remedy available to us against a solvent counterparty to the loan or loans, we may not be able to recover our losses resulting from these indemnity payments and repurchases. Consequently, our results of operations may be adversely affected.



Risks Related to Our Operations





A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.



Our ability to adequately conduct and grow our business is dependent on our ability to create and maintain an appropriate operational and organizational control infrastructure. Operational risk can arise in numerous ways including employee fraud, theft or malfeasance; customer fraud; and control lapses in bank operations and information technology. Because the nature of the financial services business involves a high volume of transactions, certain errors in processing or recording transactions appropriately may be repeated or compounded before they are discovered. Our dependence on our employees and automated systems, including the automated systems used by acquired entities and third parties, to record and process transactions may further increase the risk that technical failures or tampering of those systems will result in losses that are difficult to detect. We are also subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control. In addition, products, services and processes are continually changing and we may not fully appreciate or identify new operational risks that may arise from such changes. Failure to maintain an appropriate operational infrastructure can lead to loss of service to customers, additional expenditures related to the detection and correction of operational failures, reputational damage and loss of customer confidence, legal actions, and noncompliance with various laws and regulations.



We continuously monitor our operational and technological capabilities and make modifications and improvements when we believe it will be cost effective to do so. However, there are inherent limits to such capabilities. In some instances, we may build and maintain these capabilities ourselves. We also outsource some of these functions to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. Third parties may fail to properly perform services or comply with applicable laws and regulations, and replacing third party providers could entail significant delay and expense. We also face risk from the integration of new infrastructure platforms and/or new third party providers of such platforms into existing businesses.



An interruption or breach in our information systems or infrastructure, or those of third parties, could disrupt our business, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.



Our business is dependent on our ability to process and monitor a large number of transactions on a daily basis and to securely process, store and transmit confidential and other information on our computer systems and networks. We rely heavily on our information and communications systems and those of third parties who provide critical components of our information and communications infrastructure. These systems are critical to the operation of our business and essential to our ability to perform day-to-day operations. Our financial, accounting, data processing or other information systems and facilities, or those of third parties on whom we rely, may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, cyber-attack or other unforeseen catastrophic events, which may adversely affect our ability to process transactions or provide services.



Although we make continuous efforts to maintain the security and integrity of our information systems and have not experienced a significant, successful cyber-attack, threats to information systems continue to evolve and there can be no assurance that our security efforts and measures, or those of third parties on whom we rely, will continue to be effective. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Threats to our information systems may originate externally from third parties such as foreign governments, organized crime and other hackers, outsourced or infrastructure-support providers and application developers, or may originate internally. In addition, customers may use computers, smartphones and other mobile devices not protected by our control systems to access our products and services, including through bank kiosks or other remote locations. As a financial institution, we face a heightened risk of a security breach or disruption from attempts to gain unauthorized access to our and our customers’ data and financial information, whether through cyber-attack, cyber intrusion over the internet, malware, computer viruses, attachments to e-mails, spoofing, phishing, or spyware. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.



As a result, our information, communications and related systems, software and networks may be vulnerable to breaches or other significant disruptions that could: (1) disrupt the proper functioning of our networks and systems, which could in turn disrupt our

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operations and those of certain of our customers; (2) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers, including account numbers and other financial information; (3) result in a violation of applicable privacy and other laws, subjecting us to additional regulatory scrutiny and exposing us to civil litigation and possible financial liability; (4) require significant management attention and resources to remedy the damages that result; and (5) harm our reputation or impair our customer relationships. The occurrence of such failures, disruptions or security breaches could have a negative impact on our results of operations, financial condition and cash flows. To date we have not experienced an attack that has significantly impacted our results of operations, financial condition and cash flows. However, “denial of service” attacks continue to be launched against a number of other large financial services institutions. Such attacks adversely affected the performance of certain institutions’ websites, and, in some instances, prevented customers from accessing secure websites for consumer and commercial applications. Future attacks could prove to be even more disruptive and damaging, and as threats continue to evolve, we may not be able to anticipate or prevent all such attacks.



We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy will afford coverage for all possible losses or would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third party’s systems failing or experiencing attack.



We must attract and retain skilled personnel.



Our success depends, in substantial part, on our ability to attract and retain skilled, experienced personnel in key positions within the organization. Competition for qualified candidates in the activities and markets that we serve is intense. If we are not able to hire or retain these key individuals, we may be unable to execute our business strategies and may suffer adverse consequences to our business, financial condition and results of operations.



If we are unable to attract and retain qualified employees, or do so at rates insufficient to maintain our competitive position, or if compensation costs required to attract and retain employees increase materially, our business and results of operations could be materially adversely affected.



Natural and man-made disasters could affect our ability to operate.



Our market areas are susceptible to hurricanes. Natural disasters, such as hurricanes, and man-made disasters, such as oil spills in the Gulf of Mexico, can disrupt our operations; result in significant damage to our properties or properties and businesses of our borrowers, including property pledged as collateral; interrupt our ability to conduct business; and negatively affect the local economies in which we operate.



We cannot predict whether or to what extent damage caused by future hurricanes and other disasters will affect our operations or the economies in our market areas, but such events could cause a decline in loan originations, a decline in the value or destruction of properties securing the loans and an increase in the risk of delinquencies, foreclosures or loan losses.



We are exposed to reputational risk.



Negative public opinion can result from our actual or alleged conduct in activities, such as lending practices, data security breaches, corporate governance policies and decisions, and acquisitions, any of which may damage our reputation. Additionally, actions taken by government regulators and community organizations may also damage our reputation. Negative public opinion could adversely affect our ability to attract and retain customers or expose us to litigation and regulatory action.



Returns on pension plan assets may not be adequate to cover future funding requirements.



Investments in the portfolio of our defined benefit pension plan may not provide adequate returns to fully fund benefits as they come due, thus causing higher annual plan expenses and requiring additional contributions by us.



The value of our goodwill and other intangible assets may decline in the future.



A significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock may necessitate our taking charges in the future to reflect an impairment of our goodwill. Future regulatory actions could also have a material impact on assessments of goodwill for impairment.



Adverse events or circumstances could impact the recoverability of our intangible assets including loss of core deposits, significant losses of credit card accounts and/or balances, increased competition or adverse changes in the economy. To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded, which could have a material adverse effect on our results of operations.

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Risks Related to Our Business Strategy



We are subject to industry competition which may have an impact upon our success.



Our profitability depends on our ability to compete successfully in a highly competitive market for banking and financial services, and we expect such challenges to continue. Certain of our competitors are larger and have more resources than we do. We face competition in our regional market areas from other commercial banks, savings associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, mutual funds and insurance companies, and other financial institutions that offer similar services. Some of our nonbank competitors are not subject to the same extensive supervision and regulation to which we or the Bank are subject, and may accordingly have greater flexibility in competing for business. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by other firms. These developments could result in our competitors gaining greater capital and other resources, or being able to offer a broader range of products and services with more geographic range.



Another competitive factor is that the financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. Our future success may depend, in part, on our ability to use technology competitively to provide products and services that provide convenience to customers and create additional efficiencies in our operations. The widespread adoption of new technologies could require us to make substantial capital expenditures to modify or adapt our systems to remain competitive and offer new products and services. We may not be successful in introducing new products and services in response to industry trends or developments in technology, or those new products may not be accepted by customers.



If we are unable to successfully compete for new customers and to retain our current customers, our business, financial condition or results of operations may also be adversely affected, perhaps materially. In particular, if we experience an outflow of deposits as a result of our customers desiring to do business with our competitors, we may be forced to rely more heavily on borrowings and other sources of funding to operate our business and meet withdrawal demands, thereby adversely affecting our net interest margin.



Our future growth and financial performance may be negatively affected if we are unable to successfully execute our growth plans, which may include acquisitions and de novo branching.



We may not be able to continue our organic, or internal, growth, which depends upon economic conditions, our ability to identify appropriate markets for expansion, our ability to recruit and retain qualified personnel, our ability to fund growth at a reasonable cost, sufficient capital to support our growth initiatives, competitive factors, banking laws, and other factors.



We may seek to supplement our internal growth through acquisitions. We cannot predict the number, size or timing of acquisitions, or whether any such acquisition will occur at all. Our acquisition efforts have traditionally focused on targeted banking entities in markets in which we currently operate and markets in which we believe we can compete effectively. However, as consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. We may compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an acquisition than we are able or willing to pay.



We also may be required to use a substantial amount of our available cash and other liquid assets, or seek additional debt or equity financing, to fund future acquisitions. Such events could make us more susceptible to economic downturns and competitive pressures, and additional debt service requirements may impose a significant burden on our results of operations and financial condition. If we are unable to locate suitable acquisition candidates willing to sell on terms acceptable to us, or we are otherwise unable to obtain additional debt or equity financing necessary for us to continue making acquisitions, we would be required to find other methods to grow our business and we may not grow at the same rate we have in the past, or at all.



We must generally satisfy several conditions, including receiving federal regulatory approval, before we can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, and future prospects. The regulators also review current and projected capital ratios and levels; the competence, experience, and integrity of management and its record of compliance with laws and regulations; the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act) and the effectiveness of the acquiring institution in combating money laundering activities. We cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We may also be required to sell banks or branches as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition. Additionally, federal and/or state regulators may charge us with regulatory and compliance failures of an acquired business that occurred prior to the date of acquisition, and such failures may result in the imposition of formal or informal enforcement actions.



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We cannot assure you that we will be able to successfully consolidate any business or assets we acquire with our existing business. The integration of acquired operations and assets may require substantial management effort, time and resources and may divert management’s focus from other strategic opportunities and operational matters. Acquisitions may not perform as expected when the transaction was consummated and may be dilutive to our overall operating results. Specifically, acquisitions could result in higher than expected deposit attrition, loss of key employees or other consequences that could adversely affect our ability to maintain relationships with customers and employees. We may also sell or consider selling one or more of our businesses. Such a sale would generally be subject to certain federal and/or state regulatory approvals, and may not be able to generate gains on sale or related increases in shareholder’s equity commensurate with desirable levels.



In addition to the acquisition of existing financial institutions, as opportunities arise, we plan to continue de novo branching as a part of our internal growth strategy and possibly enter into new markets through de novo branching. De novo branching and any acquisition carry numerous risks, including the following:



We have experienced, to some extent, many of these risks with our de novo branching to date.



The Company’s decisions regarding the credit risk associated with the loan portfolio acquired from First NBC could be incorrect and its credit mark may be inadequate, which may adversely affect the financial condition and results of operations of the Company after the transaction.



Before entering into the First NBC transaction, the Company conducted extensive due diligence on a significant portion of the loans acquired from First NBC.  However, the Company’s review did not encompass each and every loan in the loan portfolio acquired.  In accordance with customary industry practices, the Company evaluated the loan portfolio based on various factors including, among other things, historical loss experience, economic risks associated with each loan category, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, and general economic conditions, both local and national.  In this process, the Company’s management made various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness and financial condition of the borrowers, the value of the real estate, which is obtained from independent appraisers, other assets serving as collateral for the repayment of the loans, the existence of any guarantees and the economic environment in which the borrowers operate.  If the Company’s assumptions and judgments turn out to be incorrect, including as a result of the fact that its due diligence review did not cover each individual loan, the Company’s estimated credit mark against the loan portfolio in total may be insufficient to cover actual loan losses after the transaction closes, and adjustments may be necessary to allow for different economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside management’s control may require an increase in the provision for loan losses.  Material additions to the credit mark and/or allowance for loan losses would materially decrease the Company’s net income.



Changes in retail distribution strategies and consumer behavior may adversely impact our investments in bank premises, equipment, technology and other assets and may lead to increased expenditures to change our retail distribution channel.



We have significant investments in bank premises and equipment for our branch network.  Advances in technology such as e-commerce, telephone, internet and mobile banking, and in-branch self-service technologies including automated teller machines and other equipment, as well as an increasing customer preference for these other methods of accessing our products and services, could decrease the value of our branch network, technology, or other retail distribution physical assets and may cause us to change our retail distribution strategy, close and/or sell certain branches or parcels of land held for development and restructure or reduce our remaining branches and work force. These actions could lead to losses on these assets or could adversely impact the carrying value of any long-lived assets and may lead to increased expenditures to renovate, reconfigure or close a number of our remaining branches or to otherwise reform our retail distribution channel.



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Risks Related to the Legal and Regulatory Environment



We are subject to regulation by various federal and state entities.



We are subject to the regulations of the Commission, the Federal Reserve, the FDIC, the CFPB and the MDBCF. New regulations issued by these agencies may adversely affect our ability to carry on our business activities. We are subject to various federal and state laws, and certain changes in these laws and regulations may adversely affect our operations. Other than the federal securities laws, the laws and regulations governing our business are intended primarily for the protection of our depositors, our customers, the financial system and the FDIC insurance fund, not our shareholders or other creditors. Further, we must obtain approval from our regulators before engaging in certain activities, and our regulators have the ability to compel us to, or restrict us from, taking certain actions entirely, such as increasing dividends, entering into merger or acquisition transactions, acquiring or establishing new branches, and entering into certain new businesses. Noncompliance with certain of these regulations may impact our business plans, including our ability to branch, offer certain products, or execute existing or planned business strategies.



The U.S. government responded to the 2008 financial crisis at an unprecedented level by introducing various actions and passing legislation such as the Dodd-Frank Act that place increased focus and scrutiny on the financial services industry. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as the one that occurred in 2008-2009. New regulations from the CFPB, which was established by the Dodd-Frank Act, such as the Ability to Repay Rules, may materially raise the risk of consummating consumer credit transactions. The full impact on our business and operations will not be fully known for years until regulations implementing the statute are fully implemented and applied. The new rules issued in the wake of the Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.



Additionally, the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act have impacted our regulatory capital levels. Basel III and its regulations require bank holding companies and banks to undertake significant activities to demonstrate compliance with the new and higher capital standards. Compliance with these rules impose additional costs on banking entities and their holding companies. The need to maintain more and higher quality capital as well as greater liquidity going forward could limit our business activities and our ability to maintain dividends. In addition, the new liquidity standards could require us to increase our holdings of highly liquid short-term investments, thereby reducing our ability to invest in longer-term, potentially higher yielding assets. We may also be required to pay significantly higher deposit insurance premiums if the number of bank failures or the cost of resolving failed banks increase. For additional information regarding the Dodd-Frank Act, Basel III and other regulations to which our business is subject, see “Supervision and Regulation.”



Any of the laws or regulations to which we are subject, including tax laws, regulations or their interpretations, may be modified or changed from time to time, and we cannot be assured that such modifications or changes will not adversely affect us. Failure to appropriately comply with any such laws or regulations could result in sanctions by regulatory authorities, civil monetary penalties or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.



Changes in accounting policies or in accounting standards could materially affect how we report our financial condition and results of operations.



The preparation of consolidated financial statements in conformity with U.S generally accepted accounting principles (“GAAP”), including the accounting rules and regulations of the Commission and the Financial Accounting Standards Board (the “FASB”), requires management to make significant estimates and assumptions that affect our financial statements by affecting the value of our assets or liabilities and results of operations. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because materially different amounts may be reported if different estimates or assumptions are used. If such estimates or assumptions underlying our financial statements are incorrect, our financial condition and results of operations could be adversely affected.



From time to time, the FASB and the Commission change the financial accounting and reporting standards or the interpretation of such standards that govern the preparation of our external financial statements. These changes are beyond our control, can be difficult to predict, may require extraordinary efforts or additional costs to implement and could materially impact how we report our financial condition and results of operations. Additionally, we may be required to apply a new or revised standard retrospectively, resulting in the restatement of prior period financial statements in material amounts.



We and other financial institutions have been the subject of litigation, investigations and other proceedings which could result in legal liability and damage to our reputation.



We and certain of our directors, officers and subsidiaries may be named from time to time as defendants in various class actions and other litigation relating to our business and activities. Past, present and future litigation has included or could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We are also involved from time

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to time in other reviews, investigations and proceedings (both formal and informal) by governmental, law enforcement and self-regulatory agencies regarding our business. These matters could result in adverse judgments, settlements, fines, penalties, injunctions, amendments and/or restatements of our Commission filings and/or financial statements, determinations of material weaknesses in our disclosure controls and procedures or other relief. Like other financial institutions and companies, we are also subject to risk from employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against us, as well as matters in which we are involved that are ultimately determined in our favor, could materially adversely affect our business, financial condition or results of operations, cause significant reputational harm to our business, divert management attention from the operation of our business and/or result in additional litigation.



In addition, in recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. In the future, we could become subject to claims based on this or other evolving legal theories.



Risks Related to Our Common Stock



Securities issued may be senior to our common stock and may have a dilutive effect.



Our common stock ranks junior to all of our existing and future indebtedness with respect to distributions and liquidation. In addition, future issuances of equity securities, including pursuant to outstanding options, could dilute the interests of our existing shareholders, including you, and could cause the market price of our common stock to decline. The issuance of any additional shares of common or preferred stock could be substantially dilutive to shareholders of our common stock. Moreover, to the extent that we issue restricted stock units, phantom shares, stock appreciation rights, options or warrants to purchase our common stock in the future and those stock appreciation rights, options or warrants are exercised or as the restricted stock units vest, our shareholders may experience further dilution.



Holders of our shares of common stock do not have preemptive rights. Additionally, sales of a substantial number of shares of our common stock in the public markets and the availability of those shares for sale could adversely affect the market price of our common stock.



Our ability to deliver and pay dividends depends primarily upon the results of operations of our subsidiaries, and we may not pay, or be permitted to pay, dividends in the future.



We are a bank holding company that conducts substantially all of our operations through our subsidiary Bank. As a result, our ability to make dividend payments on our common stock will depend primarily upon the receipt of dividends and other distributions from the Bank.



The ability of the Bank to pay dividends or make other payments to us, as well as our ability to pay dividends on our common stock, is limited by the Bank’s obligation to maintain sufficient capital and by other general regulatory restrictions on its dividends, which have tightened since the financial crisis. The Federal Reserve has stated that bank holding companies should not pay dividends from sources other than current earnings. If these requirements are not satisfied, we will be unable to pay dividends on our common stock.



We may also decide to limit the payment of dividends even when we have the legal ability to pay them in order to retain earnings for use in our business, which could adversely affect the market value of our common stock. There can be no assurance of whether or when we may pay dividends in the future.



Anti-takeover provisions in our amended articles of incorporation and bylaws, Mississippi law, and our Shareholder Rights Plan could make a third-party acquisition of us difficult and may adversely affect share value.



Our amended articles of incorporation and bylaws contain provisions that make it more difficult for a third party to acquire us (even if doing so might be beneficial to our shareholders) and for holders of our securities to receive any related takeover premium for their securities.



We are also subject to certain provisions of state and federal law and our articles of incorporation that may make it more difficult for someone to acquire control of us. Under federal law, subject to certain exemptions, a person, entity, or group must notify the federal banking agencies before acquiring 10% or more of the outstanding voting stock of a bank holding company, including our shares. Banking agencies review the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take into account several factors, including the resources of the acquirer and the antitrust effects of the acquisition. Additionally, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank. There are also Mississippi statutory

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provisions and provisions in our articles of incorporation that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in our articles of incorporation could result in our being less attractive to a potential acquirer and limit the price that investors might be willing to pay in the future for shares of our common stock.





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ITEM 1B.       UNRESOLVED STAFF COMMENTS



None.





ITEM 2.       PROPERTIES



The Company’s main office, which is the headquarters of the holding company, is located at One Hancock Plaza, in Gulfport, Mississippi. The Bank makes portions of their main office facilities and certain other facilities available for lease to third parties, although such incidental leasing activity is not material to the Company’s overall operations.



The Company operates 237 full service banking and financial services offices and 264 automated teller machines across a Gulf south corridor comprising south Mississippi; southern and central Alabama; southern Louisiana; the northern, central, and Panhandle regions of Florida; and Houston, Texas. Additionally, the Company operates a loan production office in Nashville, Tennessee. The Company owns approximately 49% of these facilities, and the remaining banking facilities are subject to leases, each of which we consider reasonable and appropriate for its location. We ensure that all properties, whether owned or leased, are maintained in suitable condition. We also evaluate our banking facilities on an ongoing basis to identify possible under-utilization and to determine the need for functional improvements, relocations, closures or possible sales. The Bank and subsidiaries of the Bank hold a variety of property interests acquired in settlement of loans. Some of these properties were acquired in transactions before 1979 and are carried at nominal amounts in our balance sheet and reflected a net loss of $13,000 in our operating results in 2016.  



ITEM 3.       LEGAL PROCEEDINGS



We and our subsidiaries are party to various legal proceedings arising in the ordinary course of business. We do not believe that loss contingencies, if any, arising from pending litigation and regulatory matters will have a material adverse effect on our consolidated financial position or liquidity.





ITEM 4.       MINE SAFETY DISCLOSURES



Not applicable.

 

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PART II



ITEM 5.       MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Market Information



The Company’s common stock trades on the NASDAQ Global Select Market under the ticker symbol “HBHC”. The following table sets forth the high and low sale prices of the Company’s common stock as reported on the NASDAQ Global Select Market. These prices do not reflect retail mark-ups, mark-downs or commissions.







There were 10,718 active holders of record of the Company’s common stock at January 31, 2017 and 84,259,371 shares outstanding. On January 31, 2017, the high and low sale prices of the Company’s common stock as reported on the NASDAQ Global Select Market were $46.40 and $45.40, respectively.  



The principal sources of funds to the Company to pay cash dividends are the dividends received from the Bank. Consequently, dividends are dependent upon the Bank’s earnings, capital needs and statutory and regulatory limitations. Federal and state banking laws and regulations restrict the amount of dividends and loans a bank may make to its parent company. Dividends paid to the Company by the Bank are subject to approval by the Commissioner of Banking and Consumer Finance of the State of Mississippi. We do not expect the foregoing restrictions to affect our ability to pay cash dividends. Although no assurance can be given that the Company will continue to declare and pay regular quarterly cash dividends on its common stock, regular cash dividends have been paid to shareholders since 1937.



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Stock Performance Graph



The following performance graph and related information are neither “soliciting material” nor “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent the Company specifically incorporates it by reference into such filing.



The performance graph compares the cumulative five-year shareholder return on the Company’s common stock, assuming an investment of $100 on December 31, 2011 and the reinvestment of dividends thereafter, to that of the common stocks of United States companies reported in the Nasdaq Total Return Index and the common stocks of the KBW Regional Banks Total Return Index. The KBW Regional Banks Total Return Index is a proprietary stock index of Keefe, Bruyette & Woods, Inc., that tracks the returns of 50 regional banking companies throughout the United States.









Issuer Purchases of Equity Securities



On August 28, 2015, the Company approved a stock purchase program authorizing the repurchase of up to 5% of its outstanding stock, or approximately 3.9 million shares, until September 2016.  The plan expired on September 30, 2016.  Under this plan, the Company repurchased 741,393 shares of its common stock at an average price of $27.44 per share.  There were no share repurchases under this plan in 2016.









 

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ITEM 6.       SELECTED FINANCIAL DATA



The following tables set forth certain selected historical consolidated financial data and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated Financial Statements and Notes thereto included elsewhere herein.











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Reconciliation of reported to core net interest income (te) and core net interest margin (te)











Core revenue (te) and core pre-tax, pre-provision income (te)







 

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ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The purpose of this discussion and analysis is to focus on significant changes and events in the financial condition and results of operations of Hancock Holding Company and our subsidiaries during 2016 and selected prior periods. This discussion and analysis is intended to highlight and supplement financial and operating data and information presented elsewhere in this Report, including the consolidated financial statements and related notes.



This discussion includes non-GAAP financial measures to describe Hancock’s performance. An overview of the non-GAAP measures used and the reasons why management believes they are useful and important in understanding the Company’s financial condition and results of operations are included below.  A reconciliation to GAAP measures is included in “Item 6. Selected Financial Data.”





FORWARD-LOOKING STATEMENTS



This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended.  Forward looking statements that we may make include statements regarding balance sheet and revenue growth, the provision for loans losses, loan growth expectations, management’s predictions about charge-offs for loans, including energy-related credits, the impact of changes in oil and gas prices on our energy portfolio, and the downstream impact on businesses that support the energy sector, especially in the Gulf Coast region, the impact of the First NBC transaction on our performance and financial condition, deposit trends, credit quality trends, net interest margin trends, future expense levels, success of revenue-generating initiatives, projected tax rates, future profitability, improvements in expense to revenue (efficiency) ratio, purchase accounting impacts such as accretion levels, possible repurchases of shares under stock buyback programs, and the financial impact of regulatory requirements.  Also, any statement that does not describe historical or current facts is a forward-looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “forecast,” “goals,” “targets,” “initiatives,” “focus,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements are based upon the current beliefs and expectations of management and on information currently available to management. Our statements speak as of the date hereof, and we do not assume any obligation to update these statements or to update the reasons why actual results could differ from those contained in such statements in light of new information or future events.  Factors that could cause actual results to differ from those expressed in the Company’s forward-looking statements include, but are not limited to, those risk factors outlined in “Item 1A. Risk Factors.”



You are cautioned not to place undue reliance on these forward-looking statements. Hancock does not intend, and undertakes no obligation, to update or revise any forward-looking statements, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.



Non-GAAP Financial Measures



Management’s Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe Hancock’s performance.  A reconciliation of those measures to GAAP measures are provided in “Item 6. Selected Financial Data.” 



Consistent with Securities and Exchange Commission Industry Guide 3, the Company presents net interest income, net interest margin and efficiency ratios on a fully taxable equivalent (“te”) basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using a federal tax rate of 35% to increase tax-exempt interest income to a taxable-equivalent basis. The Company believes this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources.



Over the past several quarters we have disclosed our focus on strategic initiatives that were designed to replace declining levels of purchase accounting income from acquisitions with improvement in core income, which the Company defines as income excluding net purchase accounting income. The Company presents core income non-GAAP measures including core net interest income and core net interest margin, core revenue and core pre-tax, pre-provision profit.  These measures are provided to assist the reader with a better understanding of the Company’s performance period over period as well as providing investors with assistance in understanding the success management has experienced in executing its strategic initiatives.



We define Core Net Interest Income as net interest income (te) excluding net purchase accounting accretion resulting from the fair market value adjustments related to acquired operations.  We define Core Net Interest Margin as reported core net interest income, annualized, expressed as a percentage of average earning assets. 



We define Core Revenue as core net interest income and noninterest income less the amortization of the FDIC loss share receivable related to loans acquired in an FDIC assisted transaction.

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We define Core Pre-Tax, Pre-Provision Income as core revenue less noninterest expense, excluding nonoperating items and amortization of intangibles. Management believes that core pre-tax, pre-provision profit is a useful financial measure because it enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.

 

 

EXECUTIVE OVERVIEW



Current Economic Environment



After falling precipitously from July 2014 through the first quarter of 2016, West Texas Intermediate (“WTI”) Crude Oil and other energy commodity prices reflected signs of recovery and stabilization during the second half of 2016.  As a result, activity at energy-related businesses, which are concentrated mainly in the Company’s south Louisiana and Houston, Texas market areas, improved during the fourth quarter of 2016.  The North American active drilling rig count increased over 60% from 404 at May 31, 2016, to 658 at year-end.  Approximately 70% of this increase occurred in Texas and Oklahoma.  Even with the recent improvement in activity, the total active rig count remains well below third quarter 2014 totals where there were over 1,900 drilling rigs in use.  The outlook related to the energy sector from industry leaders surveyed in the most recent Summary of Commentary on Current Economic Conditions (the “Beige Book”) published January 18, 2017 was generally more optimistic than earlier in the year with anticipation of a continued steady increase in activity over the next twelve months.  Despite the increased drilling activity and increased optimism expressed by industry leaders, management still expects a recovery lag in our energy service and support credit portfolio.  Reserve-based lending credits are beginning to show signs of improvement given the stabilization in oil prices, and we expect improvement in land-based services, and non-drilling services in the Gulf of Mexico to follow.



The real estate market for single family residential properties was flat to slightly up across all of our markets during the second half of 2016.   Most brokers and builders surveyed in the Beige Book believe home sales will remain stable or increase slightly during the first quarter of 2017, with an increased demand for more affordable priced homes.  Apartment demand remains strong in most of our markets.



The commercial real estate market continues to improve in most of our footprint, with growing demand for office and industrial space in certain market areas.  Commercial construction activity has also increased in recent quarters in these sectors.  Continued improvement is expected in the commercial real estate market in 2017.  However, the Houston market is the exception to this positive outlook with an overabundance of availability as sublease space continued to spike.



The January 2017 Beige Book indicated continued tightening in the labor market.  Wages and employment were increasing, while some firms experienced difficulty finding qualified workers to fill various job levels, particularly for certain professional services and craft labor positions.  Recruiters for oilfield service firms indicated orders for hiring and training new employees for 2017 were increasing.  Activity reports related to tourism and hospitality, a critical industry to our New Orleans and Florida markets, were mixed but the near-term outlook is optimistic.



Loan demand across most of the markets that Hancock serves remained stable and the energy sector saw further improvement.  Credit quality remained solid and most firms noted an increase in deposit volumes.  Outlooks in the financial sector were mostly optimistic, mainly due to elevated hopes for regulatory and tax relief following the recent presidential election.  Overall, firms and industries surveyed in the Beige Book were optimistic about economic growth in 2017.



Overview of 2016 Financial Results



Net income for the year ended December 31, 2016 was $149.3 million, or $1.87 per diluted common share, compared to $131.5 million, or $1.64 per diluted common share in 2015. This 14% increase was mainly attributable to increases in both interest and noninterest income and decreases in noninterest expense, partially offset by an increase in provision for loan losses.  The Company’s return on average assets (ROA) for 2016 was 0.64% compared to 0.62% for 2015.



Net interest income tax-equivalent (te) totaled $685 million in 2016, a $46 million, or 7%, increase from 2015. This increase was mainly the result of the impact from a $2.0 billion increase in average earning assets. Net interest margin declined 10 basis points (bps) to 3.23% in 2016 primarily due to a $15.8 million reduction in net purchase accounting discount accretion.  Excluding the reduction in net purchase accounting discount accretion, the Company’s core net interest margin for 2016 was 3.14%, or flat compared to 2015.



Noninterest income for 2016 totaled $250.8 million compared to $237.3 million in 2015.  This $13.5 million, or 6%, increase was driven by increases in a number of categories including fees from secondary mortgage market operations, income from bank-owned life insurance and derivatives and gains on asset dispositions.



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Noninterest expense totaled $612.3 million in 2016 compared to $619.7 million in 2015.  This reduction was mainly related to an $11.3 million, or 69%, reduction in nonoperating expense items as 2015 included a number of expense items related to the Company’s implementation of its strategic initiatives targeted at enhancing revenue and increasing efficiencies.



The provision for loan losses was $110.7 million in 2016, an increase of $37.6 million compared to 2015.  During 2016, the Company experienced pressure on earnings from credit quality deterioration primarily related to its energy sector loans. The allowance for loan losses totaled $229.4 million at December 31, 2016, a $48 million increase from the previous year-end.  The allowance for loan losses related to the energy portfolio increased $28.3 million to $106.5 million at December 31, 2016, or 7.5% of energy loans outstanding.



Nonperforming loans totaled $358 million at December 31, 2016 compared to $164 million at December 31, 2015. Approximately $169 million, or 87%, of the increase was energy related. Net charge-offs from the non-purchased credit impaired portfolio totaled $59.1 million, or 0.37% of average loans outstanding in 2016.  This increased from $16.2 million, or 0.11%, in 2015.   Management continues to believe that total charge-offs from the energy related credits could approximate $65 - $95 million over the duration of the energy cycle.  Charge-offs to date for the current cycle (November 2014 – December 2016) total approximately $42 million.



Core pre-tax, pre-provision income, tax-equivalent (“te”) (“core PTPP”) was $334.8 million for the year ended December 31, 2016, compared to $267.1 million for the year ended December 31, 2015.  Management believes core PTPP is a useful financial measure as it enables investors and others to assess the ability of the Company to generate capital to cover credit losses during a credit cycle.  The Company established as one of its 2016 strategic objectives a core PTPP of $323.4 million, representing a 25% increase over 2014 core PTPP of $258.7 million.  The Company exceeded this goal by $11.4 million.



Total assets at December 31, 2016 were $24.0 billion, up about $1.1 billion, or 5%, from the prior year-end. Total loans increased $1.0 billion, or 7%, during 2016.  Net loan growth was experienced in most major product lines across the Company’s footprint, except energy, during 2016.  At December 31, 2016, energy related loans totaled $1.41 billion, or 8.4% of the loan portfolio, down $168 million from $1.58 billion at December 31, 2015.



At December 31, 2016, total deposits were $19.4 billion, up approximately $1.1 billion, or 6%, from December 31, 2015.  All deposit categories reflected a year-over-year increase. Noninterest-bearing demand deposits increased 5% to $7.7 billion, or 39% of total deposits at December 31, 2016.  Total noninterest-bearing and interest-bearing transaction and savings deposits were up $525 million, or 4%, in 2016.



On December 16, 2016, the Company issued approximately $259 million, or 6.325 million shares, of its common stock.  As a result, the Company’s tangible common equity ratio increased to 8.64% at December 31, 2016, up 102 bps from 7.62% at December 31, 2015. See Capital Resources section of this item for further discussion.



On December 30, 2016, the Company signed a purchase agreement to acquire approximately $1.3 billion in loans, nine branch locations with approximately $500 million in transaction and savings deposits and to assume approximately $600 million in FHLB borrowings from First NBC Bank.  The Company will pay a $44 million premium to First NBC for the earnings stream acquired.  The transaction is expected to add approximately $26 million in annual incremental earnings with one-time acquisition costs estimated to total approximately $12 million. As part of the transaction, the Company acquired approximately $260 million in loans from First NBC in January 2017 with the remaining portion of the transaction expected to close on March 10, 2017.



 

RESULTS OF OPERATIONS



Net Interest Income



Net interest income (te) is the primary component of our earnings and represents the difference, or spread, between revenue generated from interest-earning assets and the interest expense related to funding those assets. For analytical purposes, net interest income is adjusted to a taxable equivalent basis using a 35% federal tax rate on tax exempt items (primarily interest on municipal securities and loans).



2016 compared to 2015



Net interest income (te) for 2016 totaled $685 million, a $46 million, or 7%, increase from 2015. Excluding a $16 million decrease in net purchase accounting discount accretion, core net interest income was up $62 million in 2016 compared to 2015. This increase primarily resulted from interest earned on a $2.0 billion, or 10%, increase in average earning assets.  The average earning asset growth is attributable to a number of strategic initiatives management implemented in recent years to increase sustainable interest income in an effort to replace the decreasing amount of interest income from purchase accounting adjustments. These initiatives included, among other items, hiring experienced middle market commercial lenders in growing markets, expanding the Company’s product base in

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areas such as specialty financing, lease financing and health care, and opening business banking centers specifically designed for commercial customers.



The net interest margin declined 10 bps to 3.23% in 2016 from 3.33% in 2015 due to a 10 bp decrease in net purchase accounting discount accretion. Excluding purchase accounting discount accretion, the 2016 core net interest margin was 3.14% for both 2016 and 2015. The net interest margin is the ratio of net interest income (te) to average earnings assets. The sections on Asset/Liability Management and Net Interest Income at Risk in this section provide additional information regarding the Company’s management of interest rate risk and potential impact from changes in interest rates, respectively.



The overall reported yield on earning assets was 3.58% in 2016, down 4 bps from 2015. The reported loan portfolio yield was 4.01% in 2016 compared to 4.13% in 2015. Excluding the impact from purchase accounting discount accretion, the loan yield was up 1 bp to 3.87%.



The reported tax-equivalent yield on the investment securities portfolio increased 9 bps from 2015 to 2.37% for 2016, reflecting a change in the mix within the investment securities portfolio.  The Company increased the percentage of high-quality municipal securities in the portfolio during 2016.  These securities offer higher tax-equivalent yields than those available for mortgage-backed securities or collateral mortgage obligations. The Company also began investing in agency commercial mortgage-backed securities in 2016 that provide a slightly higher yield than residential mortgage-backed securities.  Agency commercial mortgage-backed securities totaled approximately $501 million at December 31, 2016.



The cost of funding earning assets increased 6 bps to 0.34% in 2016. The overall rate paid on interest-bearing deposits was up 12 bps from 2015 to 0.43% in 2016 as the Company’s strategic initiatives implemented during late 2014 and the first half of 2015 to grow deposits to fund loan growth resulted in slightly higher rates paid for  interest-bearing deposits. Borrowing costs decreased 9 bps from 1.37% in 2015 to 1.28% in 2016. This decrease was attributable to the Company’s borrowing mix, which included an increased usage of lower-rate FHLB borrowings secured by a portion of the Company’s residential mortgage portfolio in 2016. Interest-free funding sources, including noninterest-bearing demand deposits, funded approximately 37% of average earnings assets in 2016, up from 35% in 2015 as noninterest-bearing deposits averaged $7.2 billion in 2016, up 17% compared to 2015.



2015 compared to 2014

Net interest income (te) for 2015 totaled $639 million, a $27 million, or 4%, decrease from 2014. The decrease resulted from a $57 million decline in net purchase accounting discount accretion. Excluding the purchase accounting discount accretion, net interest income (te) increased $31 million, primarily due to $1.5 billion growth in average loans.



Compared to 2014, the reported net interest margin declined 54 bps to 3.33% in 2015. The core net interest margin was approximately 3.14% in 2015, down 19 bps from 2014.  The overall reported yield on earning assets was 3.62% in 2015, down 47 bps from 2014. The reported loan portfolio yield was 4.13% in 2015 compared to 4.71% in 2014. Excluding the impact from purchase accounting discount accretion, the loan yield decreased 10 bps to 3.86%. This decrease in loan yield was mainly attributable to the normal maturity and amortization of higher-yielding loans in the portfolio being replaced with new originations at current market rates.  The reported tax equivalent yield on the investment securities portfolio decreased 12 bps from 2014, reflecting lower yields in mortgage-backed securities and collateralized mortgage obligations (CMOs).

The cost of funding earning assets increased 6 bps to 0.28% in 2015 compared to 2014. The overall rate paid on interest-bearing deposits was up 7 bps from 2014 to 0.31% in 2015 as a result of the Company’s strategic initiatives implemented during late 2014 and the first half of 2015 to grow deposits to fund loan growth. Borrowing costs increased 29 bps from 1.08% in 2014 to 1.37% in 2015. This increase was attributable to the Company’s $150 million issuance of long-term subordinated debt. The debt was issued on March 9, 2015 at a rate of 5.95% to repurchase a portion of the Company’s common stock and to provide additional Tier 2 regulatory capital. Interest-free funding sources, including noninterest-bearing demand deposits, funded approximately 35% of average earning assets in both 2015 and 2014.



The factors contributing to the changes in net interest income (te) for 2016, 2015, and 2014 are presented in Tables 1 and 2. Table 1 shows average balances and related interest and rates. Table 2 details the effects of changes in balances (volume) and rates on net interest income in 2016 and 2015.



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TABLE 1. Summary of Average Balances, Interest and Rates (te)(a)

















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TABLE 2. Summary of Changes in Net Interest Income (te)(a) (b)





 

Provision for Loan Losses



The provision for loan losses was $110.7 million in 2016 compared to a provision of $73.0 million in 2015. The provision for non-purchased credit impaired loans in 2016 was $112.1 million, compared to $76.1 million in 2015. The increase from prior year is mainly related to the current energy cycle as discussed more fully in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Allowance for Loan and Lease Losses.” The provision for the purchased credit impaired portfolio was a credit of almost $1.4 million in 2016, compared to a credit of $3.1 million in 2015. The credits to provision in both years were primarily due to reductions in expected losses in the remaining portfolio related to the Peoples First Community Bank purchase. 



“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Allowance for Loan and Lease Losses” provides additional information on changes in the allowance for loans losses and general credit quality. Certain differences in the determination of the allowance for loan losses for originated loans and for purchased performing loans and purchased credit-impaired loans are described in Note 1 to the consolidated financial statements.

 

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Noninterest Income



2016 compared to 2015



Noninterest income for 2016 totaled $251 million, a $13.5 million, or 6%, increase from 2015. Several noninterest income categories, including secondary mortgage market operations, income from bank-owned life insurance (“BOLI”) and derivatives, and gain on sales of assets, experienced increases in 2016. These increases were partially offset by a $4.1 million decline in insurance commissions and fees as a result of the Company exiting its title insurance line of business and other strategic changes impacting the insurance line of business.



Table 3 presents the components of noninterest income for the prior three years along with the percentage changes between years:



TABLE 3. Noninterest Income

 





n/m = not meaningful



Service charges on deposit accounts were up $1.4 million, or 2% from 2015. Service charges on transaction accounts increased $1.3 million, or 4%, partially due to the new suite of consumer products introduced in 2015. Also, NSF/OD fees were up $0.8 million.



Trust fees totaled $46.6 million in 2016, a $1.0 million, or 2%, increase from 2015. The 2016 fee growth came mostly from corporate trust services with small decreases in personal and retirement services products.  Trust assets under management totaled $6.3 billion at December 31, 2016 compared to $6.1 billion at December 31, 2015.  Market volatility and uncertain economic conditions limited the ability of the Company to increase its managed asset balances and grow revenue in 2016.  



Bank card and ATM fees totaled $47.4 million in 2016, up $0.9 million, or 2% compared to 2015. Bank card and ATM fees include income from credit card, debit card and ATM transactions, and merchant service fees. Product and delivery platform enhancements, including smart phone payment functionality and improved on-line management tools, continue to drive growth.



Investment and annuity fees totaled $18.5 million in 2016 compared to $20.7 million in 2015.  The $2.2 million, or 11%, decrease is primarily attributable to a change in the mix of products sold. In the current interest rate environment, customer demand for longer-term annuity products has been replaced for shorter duration products which result in a lower up-front commission.  Additionally, the Company has shifted its focus more towards selling products with higher recurring revenue streams that earn little to no up-front commissions, but generate a higher level of recurring revenue over time.



Fees from secondary mortgage operations totaled $16.3 million in 2016, up $3.7 million, or 29%, from a year earlier. The increase is attributable to an increased level of mortgage loan production. Mortgage loan production increased approximately 41% in 2016 compared to 2015 with the percentage of loan production sold in the secondary market declining slightly. Secondary mortgage market operations fee income is generated from selling certain types of originated single-family mortgage loans into the secondary market in an effort to provide mortgage products for our customers while managing interest rate risk and liquidity. These loans are originated by the Company through its branch network. The Company typically sells its longer-term fixed-rate loans while retaining in the portfolio the majority of its adjustable rate loans as well as loans generated through certain programs to support customer relationships including programs for high net worth individuals and non-builder construction loans. The ultimate amount of loans sold in the

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secondary market relative to the amount retained by the Company is a management decision made as part of the Company’s ALCO process. The Company implemented a number of initiatives during the second half of 2015 to increase its mortgage loan production and fee income from secondary mortgage operations including an expanded sales force with originators that specialize in loans sold in the secondary market and a streamlined operation that added efficiencies to the mortgage origination process.



Insurance commissions and fees decreased $4.1 million, or 47%, from 2015. This decrease resulted from the discontinuation of our title insurance operation during the third quarter of 2015, combined with a strategic decision to reduce risk by deemphasizing the sale of certain products in the consumer financing subsidiary.



Income from bank-owned life insurance increased $2.7 million, or 25%, in 2016, to $13.6 million. This increase was mainly due to higher death benefits recognized in 2016 relative to 2015, combined with income earned from a $36.2 million year-over-year increase in the average balance of insurance contracts outstanding.



Credit-related fee income decreased $1.1 million, or 10% from 2015 mainly due to decreases in unused commitment fee income and standby letter of credit fees.



Income from derivatives totaled $5.2 million in 2016 compared to $2.7 million in 2015. The $2.5 million, or 89%, increase was driven by a significantly higher level of customer swap sales in 2016 compared to 2015.



Gains on sales of assets increased $7.6 million in 2016 compared to 2015 as a result of $4.3 million in gains from the sale of single family mortgage portfolio loans and a $3.3 million gain realized from the sale of a bank property.  The single family loans were sold as part of the Company’s balance sheet management process because certain of their terms were deemed no longer compatible with the Company’s strategic direction.



2015 compared to 2014



Noninterest income for 2015 totaled $237 million, a $9.3 million, or 4%, increase from 2014. A $6.4 million decrease in amortization of the FDIC loss share receivable and an increase in income from secondary mortgage operations were partially offset by a decrease in service charge income.



Amortization of the FDIC loss share receivable amounted to $5.7 million in 2015 compared to $12.1 million in 2014. Amortization of the FDIC loss share receivable reflects a reduction in the amount of expected reimbursements under the loss sharing agreements due to lower loss projections for the related FDIC acquired loan pools. Accounting for the loss share receivable is described in Note 1 to the consolidated financial statements. The 2015 amortization decrease is primarily related to the expiration of FDIC coverage on the non-single family portfolio in December 2014. The loss share agreement covering the single family portfolio expires in December 2019.



Fees from secondary mortgage operations totaled $12.6 million in 2015, up $4.5 million, or 57%, from a year earlier. The increase is attributable to both an increased level of mortgage loan production and selling a higher percentage of loans in the secondary market.

Trust and investment and annuity fees totaled $66.3 million in 2015, a $1.2 million, or 2%, increase over 2014. The 2015 fee growth came from virtually all product lines.

Bank card and ATM fees totaled $46.5 million in 2015, up $1.4 million, or 3% compared to 2014. Growth in both consumer and business card accounts resulting from product and delivery platform enhancements was the primary factor in the 2015 increase. These enhancements, including smart phone payment functionality and improved on-line management tools, as well as additional product enhancements implemented in 2016, resulted in continued increases in credit card and merchant fees in 2016.

Insurance commissions and fees decreased $0.9 million, or 10%, from 2014 primarily from the full year impact of selling certain business lines during the second quarter of 2014.  In the third quarter of 2015, the Company elected to exit its title insurance operation to focus on more profitable areas.   

Service charges on deposit accounts were down $4.2 million, or 5% in 2015 compared to 2014, primarily due to a decrease in overdraft charges related to a decline in overdraft/nonsufficient funds occurrences. This decline was mostly due to an increase in average balances per account in the consumer noninterest-bearing portfolio, a reduction in the number of consumer accounts resulting from branch closings and sales, and higher customer usage of our overdraft protection product.  

 

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Noninterest Expense



2016 compared to 2015



Noninterest expense for 2016 totaled $612 million, down $7.3 million, or 1%, compared to 2015. Excluding nonoperating expenses, noninterest expense increased $3.9 million, or 1%, to $607 million in 2016 compared to 2015. The largest components of this increase were personnel expense and deposit insurance and regulatory fees. These increases were partially offset by a $6.5 million decrease in other real estate expense (ORE) expense  as a result of a $5.3 million gain from the foreclosure and disposition of a large property that had been acquired in the Peoples First Community Bank acquisition.  



Table 4 presents the components of noninterest expense for the prior three years, along with the percentage changes between years. Table 4 presents operating expenses by component with nonoperating expenses aggregated, while Table 5 presents nonoperating expenses by component.



TABLE 4. Noninterest Expense







Total personnel expense was up $7.6 million, or 2%, in 2016 compared to 2015 due mainly to an increase in bonus and other incentive compensation related, in part, to the Company achieving its overall corporate objectives for 2016.

 

Total occupancy and equipment expenses decreased $5.3 million, or 9%, in 2016 compared to 2015. This decrease was attributable to a number of cost control measures implemented during the past eighteen months, including eliminating excess space through consolidation of certain back office areas and revamping our property insurance coverage.



Data processing expense in 2016 was up $3.1 million, or 6%, from 2015, primarily related to debit and credit card processing activity, as well as the outside processing costs related to new products brought on-line within the past 18 months to support the Company’s revenue initiatives.    



Professional services expense increased $1.1 million, or 4%, from 2015, primarily due to consulting and other professional fees related to the implementation of revenue initiatives. Deposit insurance and regulatory fees increased $6.8 million, or 40%, mainly due to asset growth and increases in criticized assets. Ad valorem and franchise taxes were down $1.8 million, or 17%, to $8.7 million in 2016.



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Amortization of intangibles in 2016 totaled $19.8 million, a $4.4 million, or 18%, decrease from 2015.  The Trade Name intangible related to the Whitney Holding Company acquisition was fully amortized in 2015, saving $2.4 million in 2016.



Other real estate expense for 2016 was a net credit of $3.8 million compared to net expense of $2.7 million in 2015. Excluding the $5.3 million credit related to an asset disposition mentioned above, ORE expense was down $1.2 million from 2015, as the Company’s average balance of ORE decreased $18.1 million, or 46%, in 2016 compared to 2015.



Other expenses increased $10.2 million, or 54%, to $29.0 million in 2016. The major components of this increase were a $4.0 million expense related to an early contract termination; $3.7 million in flood-related expenses associated with major flooding that impacted the Baton Rouge, Louisiana metropolitan area during August 2016; and a $1.4 million increase in fraud and other branch-related losses.



Nonoperating expenses decreased $11.3 million, or 69%, from 2015. The decline was due to expense reductions related to the Company’s expense and efficiency initiatives. Nonoperating expenses included such items as lease buy-outs, branch and equipment disposition costs and severance packages from the branch rationalization project, settlement of an FDIC assessment related to loss claim reimbursement amounts, early termination fees on repurchase obligations, and severance costs associated with organizational restructuring.  The components of nonoperating expense are presented in the table below. 





TABLE 5. Nonoperating Expense







2015 compared to 2014



Noninterest expense for 2015 totaled $620 million, up $13.0 million, or 2%, compared to 2014. Excluding nonoperating expenses, noninterest expense increased $22.4 million, or 4%, to $603 million in 2015. The largest components of this increase were personnel, data processing, advertising, regulatory, and professional services expense. The increases in these categories were mainly attributable to supporting the revenue and deposit growth initiatives implemented during 2014 and 2015.



During 2014 and 2015, management shifted its strategy regarding expenses. From the time of its acquisition of Whitney in 2011 through 2013, the Company implemented a number of initiatives aimed primarily at expense reductions through improving the Company’s infrastructure, streamlining its operation and generally improving its operating efficiency. These strategic initiatives included, among other items, a branch rationalization program that resulted in closing or selling over 50 branches during 2013 and 2014, a bank charter consolidation, selling certain insurance business lines, increasing automation through enhancing systems, and restructuring various support units within the organization to enhance operating efficiency. These initiatives resulted in a $59 million reduction in operating expenses during 2014 compared to 2013. Although the Company continues to work to improve its efficiencies, management implemented a number of initiatives beginning in the last half of 2014 and throughout 2015 aimed at growing revenue and increasing core deposits.    These included hiring additional middle market lenders in growing markets, enhancing our product offering in areas such as equipment and lease financing, card services and private banking, opening new branches designed specifically to attract new commercial customers and tailoring our marketing efforts to grow core business lines. As a result, the Company’s 2015 net revenue, excluding purchase accounting adjustments, increased $33.4 million, or 4%, compared to 2014, while operating expenses in personnel, data processing, advertising, and professional services in 2015 increased moderately.



Total personnel expense was up $11.6 million, or 4%, in 2015 compared to 2014 due to both staff increases and merit raises. The number of full-time equivalent employees grew by 127 in 2015 mostly due to the Company’s revenue initiatives. Employee benefits

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expense was up $3.5 million, or 7%. The most significant factors contributing to this increase were a $1.3 million increase in retirement-related expense and a $0.6 million increase in employee relocation expense.



Data processing expense was up $4.2 million, or 8%, primarily related to a $1.2 million increase in debit and credit card processing activity and a $2.5 million increase in computer processing charges representing the full year impact of infrastructure and delivery channel improvements made during 2014.



Professional services expense increased $2.5 million, or 10%, from 2014, primarily due to a $4.4 million increase in consulting fees related to revenue initiatives. Advertising expense increased $2.5 million, or 29%, in 2015 compared to 2014 as the Company launched a number of marketing campaigns specifically designed to target revenue and deposit growth.    Deposit insurance and regulatory fees increased $4.9 million, or 41%, from 2014 primarily due to higher premiums resulting from asset growth and credit deterioration.



Nonoperating expenses decreased $9.4 million, or 37%, in 2015, from 2014. These reductions were primarily related to implementing the Company’s expense and efficiency initiative in 2014.



 

Income Taxes



The Company recorded income tax expense at an effective rate of 20.1% in 2016, 22.6% in 2015 and 27.4% in 2014. Management expects the effective tax rate for 2017 to be in the range of 25.0% to 27.0%. The lower effective tax rates in 2015 and 2016 were due, in part, to lower pre-tax income driven by elevated provisions for loan losses related to the energy sector.  Hancock’s effective tax rates have varied from the 35% federal statutory rate primarily because of tax-exempt income and tax credits.  Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the BOLI program are the major components of tax-exempt income.  The Company’s increase in its municipal securities and loan portfolio had a significant impact on the Company’s income tax expense for 2016.  The decrease to income tax expense from tax-exempt interest income was $14.5 million for 2016 compared to $7.8 million and $6.3 million for 2015 and 2014, respectively.   



The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. These investments are made primarily in the markets the Company serves and are directed at tax credits issued under the Qualified Zone Academy Bonds (QZAB), Qualified School Construction Bonds (QSCB), as well as Federal and State New Market Tax Credit (NMTC) and Low-Income Housing Tax Credit (LIHTC) programs. The investments generate tax credits which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes. Table 6 reconciles reported income tax expense to that computed at the statutory federal tax rate for each year in the three-year period ended December 31.



TABLE 6. Income Taxes









The Company has invested in NMTC projects through investments in its own CDE, as well as, other unrelated CDEs.  These investments will generate approximately $104 million in federal and state tax credits. Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years.



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The Company intends to continue making investments in tax credit projects and qualified bonds. However, its ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits. Based only on tax credit investments that have been made to date, the Company expects to realize benefits from federal and state tax credits over the next three years totaling $9.3 million, $7.8 million and $5.6 million for 2017, 2018 and 2019, respectively.



At December 31, 2016, the Company’s deferred tax asset (net of state valuation allowance) was $104.4 million.  Several factors are considered in determining the recoverability of the deferred tax assets, such as the history of taxable earnings, reversal of taxable temporary differences, future taxable income and tax planning strategies.  Based on the Company’s review of these factors, we have established a $1.7 million valuation allowance for state net operating losses.



 

BALANCE SHEET ANALYSIS



Investment Securities



Our investment in securities was $5.0 billion at December 31, 2016, compared to $4.5 billion at December 31, 2015. The investment security portfolio is managed by ALCO to assist in the management of interest rate risk and liquidity while providing an acceptable rate of return to the Company.



Our securities portfolio consists mainly of commercial and residential mortgage-backed securities and CMOs that are issued or guaranteed by U.S. government agencies. We invest only in high quality securities of investment grade quality with a targeted duration, for the overall portfolio, generally between two and five years. At December 31, 2016, the average expected maturity of the portfolio was 5.79 years with an effective duration of 5.07 years and a weighted-average yield of 2.35%. At December 31, 2015, the average expected maturity of the portfolio was 4.90 years with an effective duration of 3.89 years and a weighted-average yield of 2.27%.  The 2016 increase in the portfolio’s expected maturity and effective duration compared to 2015 was mainly attributable to a $676 million increase in municipal securities with the majority having contractual maturities in excess of five years. These securities were purchased as part of the Company’s asset and liability management process.



There were no investments in securities of a single issuer, other than U.S. Treasury and U.S. government agency securities and mortgage-backed securities issued or guaranteed by U.S. government agencies, that exceeded 10% of stockholders’ equity. We do not invest in subprime or “Alt A” home mortgage-backed securities. Investments classified as available for sale are carried at fair value,  while held to maturity securities are carried at amortized cost. Unrealized holding gains (losses) on available for sale securities are excluded from net income and are recognized, net of tax, in other comprehensive income and in AOCI, a separate component of stockholders’ equity. 



At December 31, 2016, the amortized cost of securities available for sale totaled $2.6 billion and securities held to maturity totaled $2.5 billion compared to $2.1 billion and $2.4 billion, respectively, at December 31, 2015.  



The amortized cost of securities at December 31, 2016 and 2015 was as follows.



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TABLE 7. Securities by Type







Securities are classified according to their final contractual maturities without consideration of scheduled and unscheduled principal amortization, potential prepayments or call options. Accordingly, actual maturities will differ from their reported contractual maturities. The expected average maturity years presented in the tables includes scheduled principal payments and assumptions for prepayments.



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The amortized cost, yield and fair value of debt securities at December 31, 2016, by final contractual maturity, were as follows.



TABLE 8. Debt Securities Maturities by Type







Loan Portfolio



Total loans at December 31, 2016 were $16.8 billion, compared to $15.7 billion at December 31, 2015. The $1.0 billion, or 7%, increase was net of a $200 million decrease in the energy-related portfolio. The net loan growth was diversified across the footprint and in areas identified as part of the Company’s revenue-generating initiatives. 

The presentation of loan disclosures has been modified from prior filings to eliminate segmentation of Acquired (2011 Whitney Holding Corporation transaction) and FDIC Acquired loans (2009 Peoples First Community Bank transaction) due to the significantly reduced size of these portfolios.  The revised presentation reflects purchased credit impaired (“PCI”) loan information in select tables.  PCI loans include the total FDIC Acquired portfolio and the portion of the Acquired portfolio deemed credit impaired at acquisition. In addition, the revised presentation includes further segmentation of the commercial real estate portfolio between owner occupied and income producing loans due to the significant differences in risk characteristics of these loans and to conform more closely to regulatory concentration segments and general industry practices.  All prior period information has been reclassified to conform to the current period presentation.  



The composition of our loan portfolio consisted of the following.



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TABLE 9. Loans Outstanding by Type









The commercial and industrial (“C&I”) loan portfolio includes both commercial non-real estate and commercial real estate – owner occupied loans.  C&I loans totaled $9.5 billion, or 57% of the total loan portfolio, at December 31, 2016, and increased $666 million from December 31, 2015.  The growth, net of the $200 million decrease in the energy-related portfolio, was across the Company’s entire footprint and in most major lines including healthcare and specialty finance. 



The Company’s commercial non-real estate customer base is diversified over a range of industries, including energy, wholesale and retail trade in various durable and nondurable products and the manufacture of such products, marine transportation and maritime construction, healthcare, financial and professional services, and agricultural production. Our commercial non-real estate lending is mainly to middle-market and smaller commercial entities, although we do participate in larger shared-credit loan facilities with businesses well known to the relationship officers and generally operating in the Company’s market areas. Shared credits funded at December 31, 2016 totaled approximately $2.2 billion, of which approximately $900 million were with energy customers. Commercial non-real estate loans totaled $7.6 billion at December 31, 2016 compared to $7.0 billion at December 31, 2015.



Commercial real estate – owner occupied loans are commercial real estate mortgage loans to operating businesses.  These loans are made for long-term financing of land and buildings and are essentially repaid by cash flow generated from business operations.  Commercial real-estate – owner occupied loans increased $47 million, or 3%, from December 31, 2015 and totaled $1.9 billion at December 31, 2016.



Although decreasing over the past two years, one of the largest concentrations in the C&I portfolio is loans to the energy sector.  Loans outstanding to energy-related industry customers totaled approximately $1.4 billion, or 8% of total loans, at December 31, 2016. This represents a decrease of approximately $200 million from December 31, 2015. Approximately $930 million, or 66%, of the energy portfolio is with customers who provide transportation and other onshore and offshore services and products to support exploration and production activities. The remaining $482 million, or 34%, of the portfolio is to customers engaged in oil and gas exploration and production, which is primarily supported by proved developed producing reserves. These customers are diversified across a number of basins in the U.S. and the Gulf of Mexico and by product line. Although energy-related loans are down $200 million over the past year, management continues to work with our energy-related customers to weather this difficult cycle.  We continue to make prudently underwritten loans to qualified energy-related companies, while reducing our overall concentration of energy-related credits by focusing loan growth efforts on other specifically targeted areas.



Commercial real estate – income producing loans totaled $2.0 billion at December 31, 2016, an increase of $461 million, or 30%, from December 31, 2015.  Construction and land development loans, totaled approximately $1.0 billion at December 31, 2016, compared to $1.2 billion at December 31, 2015.  The change in commercial real estate – income producing loans and construction and land development loans partially resulted from the transfer upon completion of a number of construction permanent loans from construction to commercial real estate – income producing.



Residential mortgages were up $97 million, or 5%, during 2016. The increase in mortgage loans is due to the Company’s desire to keep mortgage loans meeting certain criteria, such as private banking loans and one-time close construction loans, in its portfolio. Consumer loans totaled $2.1 million at December 31, 2016 and were relatively flat compared to December 31, 2015.  A $154 million decrease in the consumer indirect automobile portfolio was almost entirely offset by growth in the direct consumer and retail credit card portfolios.





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The following tables provide detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes, and property type concentrations of our commercial real estate - income producing portfolios. 



TABLE 10.  Commercial & Industrial Loans by Industry Concentration

 







TABLE 11.  Commercial Real Estate – Income Producing by Property Type Concentration













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The following table shows average loans by category for each of the prior three years and the effective taxable-equivalent yield the percentage of total loans.



TABLE 12. Average Loans







Tax equivalent (te) amounts are calculated using a marginal federal income tax rate of 35%.



The following table sets forth, for the periods indicated, the approximate contractual maturity by type of the loan portfolio.



TABLE 13. Loan Maturities by Type







The sensitivity to interest rate changes for the portion of our loan portfolio that matures after one year is shown below.



TABLE 14. Loan Sensitivity to Changes in Interest Rates







Nonperforming Assets



The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, troubled debt restructurings and other real estate owned (ORE) and foreclosed assets. Loans past due 90 days or more and still accruing are also disclosed. 



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TABLE 15. Nonperforming Assets











Nonperforming assets, including nonaccrual loans, troubled debt restructurings (“TDRs”) and ORE, totaled $376.7 million at December 31, 2016, compared to $191.1 million at December 31, 2015. The net increase in nonperforming loans was mainly due to energy-related loans.  Nonperforming energy loans totaled $239 million at December 31, 2016 compared to $70 million at December 31, 2015.  The $169 million year-over-year increase impacted both the exploration and production (“E&P”) and energy support segments with E&P nonperforming loans up $68 million to $79 million and energy support service loans up $101 million to $160 million. Nonperforming assets as a percentage of total loans, ORE and foreclosed assets was 2.25% at December 31, 2016, compared to 1.22% at December 31, 2015.



Nonaccrual loans were $318.0 million at December 31, 2016, an increase of $158.3 million from December 31, 2015. The majority of this increase occurred in commercial non-real estate loans, where energy-related nonaccruals increased $133 million during 2016.



Loans modified in TDRs totaled $121.7 million at December 31, 2016 compared to $13.1 million at December 31, 2015. These totals included $81.9 million and $8.8 million, respectively, of loans reported in nonaccrual loans. TDRs arise when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and, consequently, a modification that would

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otherwise not be considered is granted to the borrower. Certain loans modified in a TDR may continue to accrue interest, depending on the individual facts and circumstances of the borrower. The $36 million increase in accruing TDRs between December 31, 2015 and December 31, 2016 is mainly attributable to two large support service energy-related loans.



ORE and foreclosed assets decreased a net $8.2 million during 2016 totaling $18.9 million at December 31, 2016.



Allowance for Loan and Lease Losses



The allowance for loan and lease losses represents management’s estimate of probable credit losses inherent in the loan and lease portfolios at period end.  The Company determines its allowance in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies.  Management, with Board of Directors oversight, is responsible for ensuring the adequacy of the allowance. The allowance is evaluated for adequacy on at least a quarterly basis. For a discussion of this process, see Note 1 to the consolidated financial statements located in “Item 8. Financial Statements and Supplementary Data.”



At December 31, 2016, the allowance for loan losses was $229.4 million compared to $181.2 million at December 31, 2015. The increase in the allowance for loan losses was primarily related to the increase in criticized and nonperforming loans in the energy portfolio. The allowance for loan losses related to the energy portfolio increased $28.3 million to $106.5 million at December 31, 2016, or 7.5% of energy loans outstanding.



The Company’s balance of criticized commercial loans totaled $1.27 billion at December 31, 2016, compared to $761 million at December 31, 2015. Criticized loans are defined as those having potential weaknesses that deserve management’s close attention (risk-rated special mention, substandard and doubtful), including both accruing and nonaccruing loans. Approximately $437 million, or 86%, of the $507 million increase was from energy-related credits. As of December 31, 2016, criticized loans in the energy portfolio were $889 million, or approximately 63% of the energy portfolio. A December 31, 2016, energy-related loans delinquent for more than 30 days, including accrual and nonaccrual loans, totaled $46 million, or 3%, of the energy portfolio.



After falling precipitously from July 2014 through the first quarter of 2016, WTI Crude Oil and other energy commodity prices reflected signs of recovery and stabilization during the second half of 2016. This stabilization in commodity prices has led to an increase in U.S drilling activity, though still significantly down from 2014 levels. It has also led to a stabilization of the Company’s criticized energy loans in the fourth quarter of 2016. Despite the increased drilling activity and the stabilization of criticized loans in the energy portfolio, management still expects a recovery lag in our energy service and support credit portfolio.  Reserve-based lending credits are beginning to show signs of improvement, and we expect land-based services and non-drilling services in the Gulf of Mexico to follow.  Management expects improving performance in the reserve-based lending portfolio in 2017, possibly leading to risk rating upgrades in that portfolio during the second half of 2017.



During 2016, the Company recorded net charge-offs of $38 million on energy-related credits.  Energy-related charge-offs to date for the current cycle (November 2014 – December 2016) totaled approximately $42 million.  Based upon information available today, management continues to believe that net charge-offs from the energy-related credits will approximate $65 to $95 million over the duration of the cycle.



Management continues to closely monitor our consumer and commercial real estate portfolios in our local energy-dependent markets. Although the Company has not experienced any significant issues in these portfolios, we could experience some credit degradation, particularly in the consumer portfolio, which may require an increase in our allowance for loan losses.



The following table provides a breakout of the Company’s allowance for loan losses for the energy portfolio, allocated by sector at December 31, 2016.



Table 16.  Energy Allowance for Loan Losses by Sector







The ratio of the allowance for loan losses as a percentage of period-end loans was 1.37% at December 31, 2016, compared to 1.15% at December 31, 2015. The allowance maintained on the non-purchased credit impaired portion of the loan portfolio totaled $211.1 million, or 1.27% of related loans, at December 31, 2016, compared to $158.1 million, or 1.02%, at December 31, 2015.

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The Company recorded a total provision for loan losses during 2016 of $110.7 million, compared to $73.0 million in 2015. The increase in the provision was mainly from a $66.3 million provision related to the energy portfolio.



Net charge-offs from the non-purchased credit impaired loan portfolio during 2016 were $59.1 million, or 0.37%, of average total loans. This compares to net non-purchased credit impaired charge-offs of $16.2 million, or 0.11% of average total loans, for the year ended December 31, 2015. Net charge-offs on the purchased credit impaired portfolio was a credit of $0.6 million in 2016 compared to net charge-offs of $1.6 million in 2015.



The following table sets forth activity in the allowance for loan losses for the periods indicated.  In the following tables, certain disaggregated information was not available for 2012 for the commercial non-real estate, construction and land development, commercial real estate – owner occupied, and commercial real estate – income producing.  In these instances, combined information for these categories is provided under the caption “commercial loans.”



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TABLE 17. Summary of Activity in the Allowance for Loan Losses









An allocation of the loan loss allowance by major loan category is set forth in the following table. The increase in the allowance for commercial non-real estate loans is primarily attributable to the energy-related portfolio discussed above. The changes in the allowance allocated to the residential mortgage and consumer categories in 2012 and 2013 reflect mainly changes in the estimate of impairment on pools of purchased credit impaired loans within these categories.



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TABLE 18. Allocation of Allowance for Loan Losses by Category







Short-Term Investments



Short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, decreased $487 million from December 31, 2015 to a total of $78 million at December 31, 2016. Average short-term investments for 2016 totaled $380 million, a $133 million, or 26% decrease from 2015. While maintaining sufficient liquidity, the Company more proactively managed these balances in 2016 by shifting a portion to higher-yielding investment securities. The decreases occurred in interest-bearing bank deposits. Short-term liquidity assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors. See the Liquidity section for further discussion regarding the Company’s liquidity management process.



Deposits



Total deposits at December 31, 2016 were $19.4 billion, up $1.1 billion, or 6%, from December 31, 2015 with increases in several categories as the Bank continued the deposit growth initiatives implemented in the second quarter of 2014. Average total deposits in 2016 of $18.7 billion were up $1.5 billion, or 9%, over 2015.  The Company was able to fund its 2016 loan growth entirely with deposit growth. In the fourth quarter of 2015, the Company redesigned its deposit product offerings, resulting in a transfer of approximately $1.2 billion of balances from low-rate interest-bearing transaction accounts to noninterest-bearing demand deposits. The Company’s product offering changes included a new suite of consumer products designed specifically to meet the changing needs of our customers. The new noninterest-bearing accounts include enhanced features such as identity theft protection, credit file monitoring and more customer-friendly pricing based upon relationship balances and direct deposit activity. To date, there has not been any significant attrition from the transferred accounts as management believes that customers judged that the additional benefits provided in the new product suite offset the interest foregone from these traditionally low-yielding products. 



As of December 31, 2016 noninterest-bearing deposits totaled $7.7 billion, a $382 million, or 5%, increase over 2015.  The proportion of noninterest-bearing deposits in the overall deposit mix was 39.4% at year-end 2016 compared to 39.7% at the end of 2015.



Interest-bearing transaction and savings deposits totaled $6.9 billion at December 31, 2016 compared to $6.8 billion at December 31, 2015. The $143 million, or 2%, increase in interest–bearing transaction and savings deposits included a $130 million increase in savings accounts and $220 million increase in consumer money market accounts partially offset by a decrease in commercial money market deposit accounts.



Interest-bearing public fund deposits at December 31, 2016 increased $310 million, or 14%, compared to December 31, 2015. Year-end public fund account balances are subject to annual fluctuations dependent upon a number of factors, including the timing of tax collections. Seasonal cash inflows from public entities in the fourth quarter of each year typically results in higher balances than at other times during the year with subsequent reductions beginning in the first quarter of the following year.



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Time deposits at December 31, 2016 increased $241 million, or 12%, from December 31, 2015. This increase was due to a $304 million increase in brokered CDs.  The Company uses brokered deposits as a funding source subject to strict parameters regarding the amount, interest rate and maturity.



Table 19 shows average balances and weighted-average rates paid on deposits for each year in the three-year period ended December 31, 2016 as well as the percentage of total deposits for each category. Table 20 shows the maturities of time certificates of deposits greater than $250,000 at December 31, 2016.



TABLE 19. Average Deposits







TABLE 20. Maturity of Time Certificates of Deposit greater than or equal to $250,000*







*     Includes public fund time deposits



Short-Term Borrowings



Table 21 shows balances for each of the past three years of short-term borrowings, which consist of federal funds purchased, securities sold under agreements to repurchase and borrowings from the FHLB. Customer repurchase agreements are a significant source of such borrowings in each year. These agreements are offered mainly to commercial customers to assist them with their ongoing cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, the amounts available over time can be volatile.



The $865 million of FHLB borrowings at December 31, 2016 consist of three $225 million and one $190 million variable-rate term notes, two maturing in 2017 and two maturing in 2020. These notes re-price monthly and may be re-paid at the Company’s option, either in whole or in-part, on any monthly re-pricing date subject to a two week advanced notice requirement. All other FHLB borrowings held had stated maturities of three months or less.



The weighted-average interest rate paid on securities sold under agreements to repurchase decreased 24 bps from 0.27% in 2014 to 0.03% in 2015. This decrease is primarily attributable to the June 2014 early redemption of $115 million in fixed rate repurchase obligations with an average interest rate of 3.43%. The early redemption reduced borrowing costs by approximately $3.9 million in 2015. 



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TABLE 21. Short-Term Borrowings







Long-Term Debt



As of December 31, 2016, long-term debt totaled $436 million, down almost $54 million from year-end 2015.  The decrease was primarily due to principal payments on the term note payable, maturing December 2018, and reductions related to the Bank’s tax credit fund activities.



In the first quarter of 2015, the Company issued $150 million of 30-year subordinated debt at a fixed rate of 5.95%. The majority of the proceeds were used to complete a stock repurchase program approved in 2014 with the remainder used for general corporate purchases. Subject to prior approval by the Federal Reserve, the Company may redeem the notes in whole or in part on any interest payment date on or after June 15, 2020. This debt qualifies as Tier 2 capital in the calculation of certain regulatory capital ratios.



The Company has $95.5 million in subordinated notes payable maturing April 2017.  The notes accrue interest at a rate of 5.875% per annum and ceased qualifying as Tier 2 capital in the calculation of certain regulatory capital ratios in April 2016.  Based on current information available, management expects to fund the repayment of these notes from either short-term liquid assets or FHLB borrowings.



The Company also entered into a 3-year senior unsecured single draw term-note facility totaling $125 million in December 2015. This facility bears interest based on LIBOR plus 1.50% per annum and requires quarterly principal payments of $4.5 million. The remaining principal balance as of December 31, 2016 was $107 million. The borrowing may be prepaid in whole or in part at any time prior to the December 18, 2018 maturity date without premium or penalty, subject to reimbursement of certain lenders’ costs. The proceeds from this facility were used to repay the remaining $123 million balance of the term note payable that matured in December 2015.



“Item 8. Financial Statements and Supplementary Data—Note 8” provides further discussion on long-term debt.



Loan Commitments and Letters of Credit



In the normal course of business, the Bank enters into financial instruments, such as commitments to extend credit and letters of credit, to meet the financing needs of their customers. Such instruments are not reflected in the accompanying consolidated financial statements until they are funded, although they expose the Bank to varying degrees of credit risk and interest rate risk in much the same way as funded loans.



Commitments to extend credit totaled $5.9 billion at December 31, 2016, of which $688 million represents commitments to extend credit to energy-related companies.  These commitments include revolving commercial credit lines, non-revolving loan commitments issued mainly to finance the acquisition and development of construction of real property or equipment, and credit card and personal credit lines. The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower

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continues to meet credit standards established in the underlying contract, which may include the maintenance of sufficient collateral coverage levels, payment and financial performance, and compliance with other contractual conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Credit card and personal credit lines are generally subject to adjustment or cancellation if the borrower’s credit quality deteriorates. A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent future cash requirements of the Company.



A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer’s financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to their customers’ other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services.



The contract amounts of these instruments reflect the Company’s exposure to credit risk. The Bank undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support.



The following table shows the commitments to extend credit and letters of credit at December 31, 2016 and 2015 according to expiration date.



TABLE 22. Loan Commitments and Letters of Credit











 

ENTERPRISE RISK MANAGEMENT



The Company proactively manages risks to capture opportunities and maximize shareholder value. The Company balances revenue generation and profitability with the inherent risks of its business activities. Enterprise risk management helps protect shareholder value by assessing, monitoring, and managing the risks associated with our businesses. Strong risk management practices enhance decision-making, facilitate successful implementation of new initiatives, and where appropriate, support undertaking greater levels of well-managed risk to drive growth and achieve strategic objectives. The Company’s risk management culture integrates a board-approved risk appetite with senior management direction and governance to facilitate the execution of the Company’s strategic plan. This integration ensures the daily management of risks by product types and continuous corporate monitoring of the levels of risk across the Company. The Company makes changes to its enterprise risk management program and risk governance framework as described here at the direction of senior management and the Board of Directors to capture opportunities and to respond to changes in its strategic, business, and operational environments.



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Risk Categories and Definitions



Consistent with other participants in the financial services industry, the primary risk exposures of the Company are credit, market, liquidity, operational, legal, reputational, and strategic. The Company has adopted these seven risk categories as outlined by the Federal Reserve Board and other bank regulators to govern the risk management of banks and bank holding companies. The Company assigns oversight responsibility for these categories within its risk committee governance structure.



Risk Committee Governance Structure



Effective risk management governance requires active oversight, participation, and interaction by senior management and the Board of Directors. Our enterprise risk management framework uses a tiered risk/reward committee structure to facilitate the timely discussion of significant risks, issues and risk mitigation strategies to inform management and the Board’s decision making. Additionally, the committee structure provides ongoing oversight and facilitates escalation within assigned portfolios. Risk committees exist at the board, governance and asset portfolio levels.



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Risk Leadership and Organization



The risk management function of the Company, which includes the Chief Risk Officer, is led by the President of Whitney Bank. The Chief Risk Officer provides overall vision, direction and leadership regarding our enterprise risk management program. The Chief Risk Officer exercises independent judgment and reporting of risk through a direct working relationship with the Board Risk Committee, and the Chief Credit Risk Officer has the same role with the Credit Risk Management Subcommittee. The functional areas reporting to the Chief Risk Officer are the enterprise risk management program office, operational risk management, model validation, loan review, regulatory relations, legal, corporate insurance and the enterprise-wide compliance program. The Chief Risk Officer also works closely with the Chief Internal Auditor to provide assurance to the Board and senior management regarding risk management controls and their effectiveness. The Chief Internal Auditor reports to the Board’s Audit Committee to assure independence of the internal audit function. Other risk management functions reporting to the President include the Chief Credit Officer, Chief Credit Risk Officer, and Bank Secrecy Act (BSA) Officer.



Credit Risk



The Bank’s primary lending focus is to provide commercial, consumer, and real estate loans to consumers, to small and middle market businesses, to larger corporate clients in their respective market areas, and to state, county, and municipal government entities. Diversification in the loan portfolio is a means to reduce the risks associated with economic fluctuations. The Bank has no significant concentrations of loans to individual borrowers or foreign entities.



Approximately 8% of the Bank’s loan portfolio consists of commercial non-real estate loans to the energy and energy-related sectors. These energy-based loans are actively reviewed, reported and managed. This level of lending to the energy sector is expected given our footprint and is an area of specialization and core competency of our organization. Managing collateral is an essential component of managing the Bank’s energy-related credit risk exposure. Collateral valuations are obtained at the time of origination, and updated if it is determined that the collateral value has deteriorated or if the loan is deemed to be a problem loan. In light of the current pressure on the energy sector, we continue to manage and reduce our exposure, improve our cross industry diversification, and proactively manage potential impacts to earnings.



The Bank monitors our levels of real estate loans throughout the year, and currently does not have a commercial real estate concentration, as defined by interagency guidelines. In light of the prevailing national housing market recovery, improving local market demand, favorable price appreciation in many markets, and positive (albeit slow) economic growth, the Company increased its exposure to residential construction/development lending during 2016; however, these lending activities will continue to be closely monitored for any potential signs of market weakness.



Managing collateral is an essential component of managing the Bank’s real estate-related credit risk exposure. For real estate-secured loans, third party valuations are obtained at the time of origination, and updated if it is determined that the collateral value has deteriorated or if the loan is deemed to be a problem loan. Property valuations are ordered through, and reviewed by, the Bank’s appraisal department. The property valuation, along with anticipated selling costs, are used to determine if there is loan impairment, leading to a recommendation for partial charge off or appropriate allowance allocation.



The Bank maintains an active Credit Review function, whose Credit Review Manager reports to the Credit Risk Management Subcommittee, a committee of the Board, to help ensure that developing credit concerns are identified and addressed in a timely manner. Further, an active watch list review process is in place as part of the Bank’s problem loan management strategy, and a list of loans 90 days past due and still accruing is reviewed with management (including the Chief Credit Officer and Chief Credit Risk Officer) at least monthly. Recommendations flow from all of the above activities with the goal of recognizing nonperforming loans and determining the appropriate accrual status. 



Asset/Liability Management



Asset liability management consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain stability in net interest income under varying interest rate environments. The principal objective of asset liability management is to maximize net interest income while operating within acceptable risk limits established for interest rate risk and maintaining adequate levels of liquidity. Our net earnings are materially dependent on our net interest income.



IRR on the Company’s balance sheet consists of re-price, option, yield curve, and basis risks. Re-price risk results from differences in the maturity or re-pricing of asset and liability portfolios. Option risk arises from “embedded options” present in many financial instruments such as loan prepayment options, deposit early withdrawal options and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Company. Yield curve risk refers to the risk resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument. Basis risk refers to the potential for changes in the underlying relationship between market rates and indices, which subsequently result in a narrowing of the profit spread on an earning asset or liability. Basis risk is also present in

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administered rate liabilities, such as savings accounts, negotiable order of withdrawal accounts, and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates.



ALCO manages our IRR exposures through pro-active measurement, monitoring, and management actions. ALCO is responsible for maintaining levels of IRR within limits approved by the Board of Directors through a risk management policy that is designed to produce a stable net interest margin in periods of interest rate fluctuation. Accordingly, the Company’s interest rate sensitivity and liquidity are monitored on an ongoing basis by its ALCO, which oversees market risk management and establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A variety of measures are used to provide for a comprehensive view of the magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships.



The Company utilizes an asset/liability model as the primary quantitative tool in measuring the amount of IRR associated with changing market rates. The model is used to perform net interest income, economic value of equity, and GAP analyses. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12-month and 24-month periods. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next 24 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate derivatives, such as interest rate swaps, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered. 



Net Interest Income at Risk



Hancock’s primary market risk is interest rate risk that stems from uncertainty with respect to absolute and relative levels of future market interest rates that affect our financial products and services. In an attempt to manage our exposure to interest rate risk, management measures the sensitivity of our net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to produce a relatively stable net interest margin under varying rate environments.



Hancock measures its interest rate sensitivity primarily by running net interest income simulations. Hancock’s balance sheet is asset sensitive over a 2 year period to rising interest rates under various shock scenarios. The model measures annual net interest income sensitivity relative to a base case scenario and incorporates assumptions regarding balance sheet growth and the mix of earning assets and funding sources as well as pricing, re-pricing and maturity characteristics of the existing and projected balance sheet.



The following table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in the yield curve at December 31, 2016. Shifts are measured in 100 basis point increments, except for the down rate scenario where the decrease is limited to 50 bps, in a range from -50 to +500 bps from base case (-50 through +300 bps presented in Table 23). Base case encompasses key assumptions for asset/liability mix, loan and deposit growth, pricing, prepayment speeds, deposit decay rates, securities portfolio cash flows and reinvestment strategy, and the market value of certain assets. The base case scenario assumes that the current interest rate environment is held constant throughout the 24-month forecast period; the instantaneous shocks are performed against that yield curve. These results indicate that we are slightly asset sensitive compared to the stable rate environment assumed for the base case.



TABLE 23. Net Interest Income (te) at Risk







Note: Decrease in interest rates limited to a 50 basis point decrease in current rate environment



These scenarios are instantaneous shocks that assume balance sheet management will mirror base case. Should the yield curve begin to rise or fall, management has strategies available to maximize earnings opportunities or offset the negative impact to earnings. For example, in a rising rate environment, deposit pricing strategies could be adjusted to offer more competitive rates on long and medium-term CDs and less competitive rates on short-term CDs. Another opportunity at the start of such a cycle would be reinvesting the securities portfolio cash flows into short-term or floating-rate securities. On the loan side, the Company can make more floating-

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rate loans that tie to indices that re-price more frequently, such as LIBOR (London interbank offered rate) and make fewer fixed-rate loans. Finally, there are a number of hedge strategies by which management could use derivatives, including swaps and purchased ceilings, to lock in net interest margin protection.



Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. Strategic management of our balance sheet and earnings is fluid and would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Certain assets such as adjustable-rate loans have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Also, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all of these factors in monitoring exposure to interest rate risk.



Liquidity



Liquidity management is focused on ensuring that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Bank and other subsidiaries. Hancock develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process.



TABLE 24. Liquidity Metrics







The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with the Federal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. Free securities represent unpledged securities, and include securities assigned to short-term dealer repurchase agreements or to the Federal Reserve Bank discount window. Management has established an internal target for the ratio of free securities to total securities to be 15% or more. As shown in Table 24 above, our ratios of free securities to total securities were 23.46% and 20.29%, respectively, at December 31, 2016 and 2015. The increase in total securities outpaced the growth in funds that require pledging. The ratio at December 31, 2014 was slightly below target level, which management allows on a temporary basis, due to security pledging requirements for the seasonal increase in public fund deposits.   



The liability portion of the balance sheet provides liquidity through various customers’ interest-bearing and noninterest-bearing deposit accounts. At December 31, 2016, deposits totaled $19.4 billion, an increase of $1.1 billion, or 6%, from December 31, 2015. Core deposits represent total deposits less CDs of $250,000 or more, brokered deposits, and overnight treasury management deposits. Core deposits comprised 93.22% of total deposits at December 31, 2016, compared to 94.90% a year earlier. Brokered deposits totaled $693 million as of December 31, 2016 compared to $361 million at December 31, 2015. The Company’s use of brokered deposits as a funding source is subject to strict parameters regarding the amount, term, and interest rate.



The Company’s loan to deposit ratio (average loans outstanding divided by average deposits) was 86.11% for 2016, up 183 bps from 2015, as average loans grew at a faster pace than average deposits. The loan to deposit ratio measures the amount of funds the Company lends out for each dollar of deposits on hand. The Company has established an internal target range for the loan to deposit ratio from 83% to 87%. 



Purchases of federal funds, securities sold under agreements to repurchase (repos) and other short-term borrowings are additional sources of liquidity to meet short-term funding requirements. Wholesale funds, which represent short-term borrowings and long-term debt, were 9.18% of core deposits at December 31, 2016 and 11.02% at December 31, 2015. Wholesale funds decreased $258 million (mostly repos), while core deposits were up $695 million in 2016.



In addition to the sources of liquidity discussed above, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. At December 31, 2016, the Bank had borrowed $865 million from the FHLB and had approximately $3.2

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billion available under this line. The Bank also has unused borrowing capacity at the Federal Reserve’s discount window of approximately $1.8 billion. The Company did not have any outstanding borrowings with the Federal Reserve at either December 31, 2016, or December 31, 2015.



Cash generated from operations is another important source of funds to meet liquidity needs. The consolidated statements of cash flows present operating cash flows and summarize all significant sources and uses of funds for each of the three years in the period ended December 31, 2016.



Dividends received from the Bank have been the substantial source of funds available to the Company for the payment of dividends to our stockholders and for servicing any debt issued by the holding company. The liquidity management process recognizes the various regulatory provisions that can limit the amount of dividends that the Bank can distribute to the Company, as described in Note 10 to the consolidated financial statements. It is the Company’s policy to maintain cash or other unencumbered liquid assets at the holding company to provide liquidity sufficient to fund six quarters of anticipated stockholder dividends.



 

CONTRACTUAL OBLIGATIONS



The following table summarizes all significant contractual obligations at December 31, 2016, according to payments due by period. Obligations under deposit contracts and short-term borrowings are not included. The maturities of time deposits are in Table 20. Purchase obligations represent legal and binding contracts to purchase services and goods that cannot be settled or terminated without paying substantially all of the contractual amounts.



TABLE 25. Contractual Obligations







 

CAPITAL RESOURCES



The Company currently has a strong capital position which is vital to continued profitability, promotes depositor and investor confidence and provides a solid foundation for future growth and flexibility in addressing strategic opportunities. Stockholders’ equity totaled $2.7 billion at December 31, 2016 compared to $2.4 billion at December 31, 2015. The $307 million increase primarily resulted from a $259 million common stock issuance. In addition, net income of $149 million was partially offset by $77 million in dividends and a $40 million decrease in other comprehensive income related to net actuarial losses in the unfunded pension liability and the market adjustment to the AFS portfolio.



On December 16, 2016, the Company issued approximately $259 million, or 6.325 million shares, of its common stock at approximately $41.00 per share. This additional capital will be used to support recent and anticipated Company growth including the purchase of certain assets including $1.3 billion in loans and nine branches and assumption of certain liabilities from First NBC. The transaction was announced on December 30, 2016, and is expected to close on March 10, 2017.



The Company’s tangible common equity ratio was 8.64% at December 31, 2016, compared to 7.62% a year earlier. The increase in tangible capital is mainly attributable to the common stock issuance. The Company has established an internal target for the tangible common equity ratio of at least 8.00%. However, management will allow the Company’s tangible common equity ratio to drop below 8.00% on a temporary basis if it believes that the shortfall can be replenished through normal operations within a short time frame.



The primary quantitative measures that regulators use to gauge capital adequacy are the ratios of total, tier 1 and common equity tier 1 regulatory capital to risk-weighted assets (risk-based capital ratios) and the ratio of Tier 1 capital to average total assets (leverage ratio). The Federal Reserve Board’s final rule implementing the Basel III regulatory capital framework and related Dodd-Frank Act changes was effective for the Company on January 1, 2015. The final rule strengthened the definition of regulatory capital, increased risk-based capital requirements, and made selected changes to the calculation of risk-weighted assets. The rule sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier 1 ratio of 4.5% of risk-weighted assets, raises the minimum Tier 1 capital ratio from 4.0% to 6.0% of risk-weighted assets and sets a new conservation buffer of 2.5%

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of risk-weighted assets; however, the rule allows for transition periods for certain changes, including the conservation buffer. Based on capital ratios as of December 31, 2016 using Basel III definitions, the Company and the Bank exceeded all capital requirements of the new rule, including the fully phased-in conservation buffer. The Company and the Bank have established internal targets for its total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage ratio of 11.5%, 9.5% and 7.0%, respectively.



At December 31, 2016, our capital balances were in excess of current regulatory minimum requirements and internal targets. Additionally, both the Company and the Bank were considered “well capitalized” by regulatory agencies.  The following table shows the Company’s regulatory ratios for the past five years. “Note 10. Stockholders’ Equity” to the consolidated financial statements provides additional information about the Bank’s regulatory capital ratios.



TABLE 26.  Risk-Based Capital and Capital Ratios







*     Common equity tier 1 capital only effective for years ended December 31, 2016 and 2015.



The Company’s regulatory capital ratios remained strong at December 31, 2016 with common equity tier 1 and Tier 1 risk-weighted asset ratios at 11.26%, and total risk-weighted asset ratios at 13.21%. The increases in these ratios compared to 2015 reflect the impact of the common stock issuance, partially offset by the increase in risk-weighted assets resulting from loan growth. The increase in the leverage ratio was mainly due to the common stock issuance, partially offset by quarterly average total assets growing by 6%  in 2016 compared to 2015.

 

STOCK REPURCHASE PROGRAM



In September 2016, the Company’s stock repurchase plan that had been approved by the Board of Directors on August 28, 2015 expired. The plan had authorized the repurchase of up to 5%, or approximately 3.9 million shares of its outstanding common stock. Under this plan, the Company repurchased 741,393 shares of its common stock at an average price of $27.44 per share.  There were no repurchases under the plan in 2016. 



In March 2015, the Company completed the prior stock repurchase program that had been approved by the Company’s Board of Directors on July 16, 2014 which authorized the repurchase of up to 5%, or approximately 4.1 million shares, of its outstanding common stock. Under this plan, the Company repurchased a total of 4.1 million shares of its common stock at an average price of $30.02 per share.



See “Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for additional discussion of the Company’s common stock buyback program.



PENDING ACQUISITION



On December 30, 2016, Whitney Bank signed a purchase agreement to acquire approximately $1.3 billion in loans, nine branch locations with approximately $500 million in mainly transaction and savings deposits and to assume approximately $600 million in FHLB borrowings from First NBC.  The Company will pay a $44 million premium to First NBC for the earnings stream acquired.  The transaction is expected to add approximately $26 million in annual incremental earnings with one-time acquisition costs estimated to total approximately $12 million. As part of the transaction, the Company acquired approximately $260 million in loans from First NBC in January 2017. The remaining portion of the transaction is expected to close on March 10, 2017.

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The nine branches to be acquired are in the greater New Orleans region including seven in the New Orleans MSA.  The loans to be acquired are all performing with an average yield in excess of 5%.  The loan portfolio acquired is well-diversified and does not include any energy-related loans.  As a result of the transaction, the Company’s pro forma energy concentration decreases to 7.8% of total loans outstanding as of December 31, 2016. Management estimates that the loan portfolio will include a 4% purchase accounting market valuation adjustment.  The deposits to be acquired are transaction and savings accounts with an average interest rate of 0.88%.    The Company will close approximately 10 overlapping branches, located within close proximity to the purchased First NBC branches or existing Whitney branches, during 2017.    



Included in the following table are pro forma metrics assuming the transaction had closed as of December 31, 2016.







Table 27.  Key Metrics (Pending Acquisition)



 

FOURTH QUARTER RESULTS



Net income for the fourth quarter of 2016 was $51.8 million, or $0.64 per diluted common share, compared to $46.7 million, or $0.59, and $15.3 million, or $0.19, respectively in the third quarter of 2016 and the fourth quarter of 2015. The following discussion highlights recent factors impacting Hancock’s results of operations and financial position.



Highlights of the Company’s fourth quarter of 2016 results (compared to third quarter 2016):



Total loans at December 31, 2016 were $16.8 billion, an increase of $681 million, or 4%, from September 30, 2016.  The Company’s net loan growth during the quarter was diversified across the footprint and also in areas identified as part of the Company’s revenue-generating initiatives.



Total deposits at December 31, 2016 were $19.4 billion, up $539 million, or 3%, from September 30, 2016. The fourth quarter increase reflected year-end seasonality of both commercial and public fund customers. Historically, customers have built deposits at year-end, particularly in demand deposits, with some of those deposits being withdrawn in the first quarter.



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Noninterest-bearing demand deposits (DDAs) totaled $7.7 billion at December 31, 2016, up $115 million from September 30, 2016. DDAs comprised 39% of total period-end deposits at December 31, 2016. Interest-bearing transaction and savings deposits totaled $6.9 billion at year-end 2016, up $290 million, or 4%, compared to September 30, 2016.



Time deposits of $2.3 billion decreased $36 million, or 2%, while interest-bearing public fund deposits increased $170 million, or 7%, to $2.6 billion at December 31, 2016.



Hancock recorded a total provision for loan losses for the fourth quarter of 2016 of $14.5 million, down from $19.0 million in the third quarter of 2016.   Net charge-offs from the non-purchased credit impaired loan portfolio were $20.4 million, or 0.50% of average total loans on an annualized basis in the fourth quarter of 2016, compared to $9.5 million, or 0.24% of average total loans, for the third quarter of 2016.  Included in the fourth quarter total were $11.9 million in charge-offs related to one energy credit in the drilling support sector.  Energy charge-offs were $4.4 million in the third quarter of 2016.



Net interest income (te) for the fourth quarter of 2016 was $175.3 million, up $5.0 million from the third quarter of 2016.  During the fourth quarter, the impact on net interest income from purchase accounting adjustments (PAAs) declined $0.8 million to $3.8 million.  Excluding the impact from purchase accounting items, net interest income increased $5.9 million linked-quarter.  The increase is due to improvement in volume during the quarter.  Average earning assets were $21.5 billion for the fourth quarter of 2016, up $265 million, or 1%, from the third quarter of 2016.



The reported net interest margin (te) was 3.26% for the fourth quarter of 2016, up 6 bps from the third quarter of 2016.  The net interest margin, excluding net purchase accounting adjustments, increased 7 bps to 3.19% during the fourth quarter of 2016.  The main driver of the expansion was a change in the mix of earning assets during the quarter coupled with an increase of 4 bps in the securities portfolio. 



Noninterest income, including securities transactions, totaled $65.9 million for the fourth quarter of 2016, up $2.9 million, or 5%, from the third quarter of 2016.  Included in the total is amortization of $1.2 million related to the FDIC indemnification asset, down from $1.5 million in the third quarter of 2016.  Excluding the impact of this item, noninterest income totaled $67.1 million, up $2.6 million, or 4% linked-quarter.  The increase is mainly attributable to a $3.3 million gain on the sale of a Company-owned banking facility in the Florida panhandle.  



Service charges on deposits totaled $18.7 million for the fourth quarter of 2016, virtually unchanged from the third quarter of 2016.  Bank card and ATM fees totaled $12.3 million, up $0.5 million, or 4%, from the third quarter of 2016. 



Trust fees totaled $11.8 million, up $0.3 million, or 2% linked-quarter.  Investment and annuity income and insurance fees totaled $5.1 million, down $0.3 million, or 6% linked-quarter.



Fees from secondary mortgage operations totaled $4.3 million for the fourth quarter of 2016, down $0.6 million, or 13% linked-quarter.



Other noninterest income (excluding the amortization of the FDIC indemnification assets noted above) totaled $14.7 million, up $2.8 million, or 24%, from the third quarter of 2016.  The linked-quarter increase is primarily driven by a $3.3 million gain on sale of bank property.



Noninterest expense for the fourth quarter of 2016 totaled $156.3 million, up $7.2 million, or 5%, from the third quarter of 2016.  The increase linked-quarter is mainly driven by personnel expense and additional expenses related to the major flooding in Baton Rouge, Louisiana in August.



Total personnel expense was $87.6 million in the fourth quarter of 2016, up $4.4 million, or 5%, from the third quarter of 2016.  The increase is related to additional incentive pay due mainly to the Company meeting its overall corporate objectives for 2016.



Occupancy and equipment expense totaled $13.9 million in the fourth quarter of 2016, up $0.5 million, or 4%, from the third quarter of 2016.



Amortization of intangibles totaled $4.8 million for the fourth quarter of 2016, down $0.1 million, or 2%, linked-quarter.



ORE expenses totaled $0.6 million in the fourth quarter of 2016.  Net gains on ORE dispositions exceeded ORE expense in the third quarter of 2016 by $5.2 million, as the third quarter included a disposition gain on an asset acquired in the 2009 Peoples First acquisition.



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Other operating expense (excluding ORE) totaled $49.4 million in the fourth quarter of 2016, down $3.4 million, or 6%, from the third quarter of 2016.  The decrease is mainly related to $4.0 million of expense from an early contract termination in the third quarter of 2016, partially offset by $1.2 million of insurance claims related to the August 2016 flooding in south Louisiana in the current quarter. 



The effective income tax rate for the fourth quarter of 2016 was 18%.  Management expects a return to the Company’s historical effective tax rate (25-27%) in 2017, excluding any changes in the tax code as a result of the presidential election.  The effective income tax rate continues to be less than the statutory rate of 35% due primarily to tax-exempt income and tax credits.



The summary of quarterly financial information appearing in “Item 8. Financial Statements and Supplementary Data” provides selected comparative financial information for each of the four quarters of 2016 and 2015. 

 

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES



The accounting principles we follow and the methods for applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. The significant accounting principles and practices we follow are described in Note 1 to the consolidated financial statements. These principles and practices require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Management evaluates the estimates and assumptions made on an ongoing basis to help ensure the resulting reported amounts reflect management’s best estimates and judgments given current facts and circumstances. The following discusses certain critical accounting policies that involve a higher degree of management judgment and complexity in producing estimates that may significantly affect amounts reported in the consolidated financial statements and notes.



Acquisition Accounting



Acquisitions are accounted for under the purchase method of accounting. Purchased assets, including identifiable intangible assets, and assumed liabilities are recorded at their respective acquisition date fair values. Management applies various valuation methodologies to these assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets and certain other assets and liabilities acquired or assumed in business combinations. Management uses significant estimates and assumptions to value such items, including, among others, projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The purchase date valuations and any subsequent adjustments also determine the amount of goodwill or bargain purchase gain recognized in connection with the business combination. Certain assumptions and estimates must be updated regularly in connection with the ongoing accounting for purchased loans. Valuation assumptions and estimates may also have to be revisited in connection with periodic assessments of possible value impairment, including impairment of goodwill, intangible assets and certain other long-lived assets. The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on the Company’s results of operations.



Allowance for Loan and Lease Losses



The allowance for loan and lease losses (ALLL) is a valuation account available to absorb losses on loans. The ALLL is established and maintained at an amount that in management’s estimation is sufficient to cover the estimated credit losses inherent in the loan and lease portfolios of the Company as of the date of the determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operational risk, concentration risk, and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for loan and lease losses. Quarterly, management estimates inherent losses in the portfolio based on a number of factors, including the Company’s past loan loss and delinquency experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral and current economic conditions.



The analysis and methodology for estimating the ALLL for originated and acquired performing loans include two primary elements. A loss rate analysis that incorporates a historical loss rate as updated for current conditions is used for loans collectively evaluated for impairment, and a specific reserve analysis is used for loans individually evaluated for impairment.



The loss rate analysis includes several subjective inputs including portfolio segmentation, portfolio risk ratings, historical look-back and loss emergence periods. Management considers the appropriateness of these critical assumptions as part of its allowance review. The loss rate analysis is supplemented by a review of qualitative factors that considers whether current conditions differ from those existing during the historical-based loss rate analysis. Such factors include, but are not limited to, problem loan trends, changes in loan profiles and volumes, changes in lending policies and procedures, current economic and business conditions and credit concentrations. While qualitative data related for these factors is used where available, there is a high level of judgment applied assumptions that are susceptible to significant change.



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The qualitative component of the December 31, 2016 allowance comprised 31% of the total allowance, compared to 33% a year earlier. The higher than historical qualitative allowance level in 2016 and 2015 is a result of being in a severe energy cycle, requiring management’s best estimate of the impact to the portfolio with minimal quantitative support. While we believe the level of allowance is sufficient to absorb losses inherent in the portfolio today, actual results could differ significantly depending on the depth and duration of the energy cycle and the overall impact to the portfolio, which remains uncertain.



For loans impaired that are individually evaluated, a specific allowance is calculated as the shortfall between the loan’s value and its recorded investment. The loan’s value is measured by either the loan’s observable market price, the fair value of the collateral of the loan (less liquidation costs) if it is collateral dependent, or by the present value of expected future cash flows discounted at the loan’s effective interest rate. Values for impaired loans are highly subjective and actual results could differ, particularly for energy-related loans impacted by volatile crude oil prices.



Goodwill Impairment Testing



Goodwill, which represents the excess of cost over the fair value of the net assets of an acquired business, is not amortized but is assessed for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment.  The impairment test compares the estimated fair value of a reporting unit with its net book value.  The Company has assigned all goodwill to one reporting unit that represents overall banking operations. The fair value of the reporting unit is based on valuation techniques that market participants would use in an acquisition of the whole unit, such as estimated discounted cash flows, the quoted market price of  Hancock’s stock adjusted for a control premium and observable average price-to-earnings and price-to-book multiples of our competitors.  If the unit’s fair value is less than its carrying value, an estimate of the implied fair value of the goodwill is compared to the goodwill’s carrying value and any impairment recognized.



The Company completed its annual impairment test of goodwill as of September 30, 2016 and concluded that there was no impairment of goodwill. 



Consistent with the prior year, the Company used multiple approaches to measure its fair value at September 30, 2016.  These included an income approach using the discounted net present value of estimated future cash flows, a transaction or price-to-book multiple approach using the actual price paid by similar companies in recent acquisition transactions and a market capitalization approach using both the Company’s actual market capitalization and an estimated market capitalization using a price-to-earnings multiple based on the Company’s 2017 forecast.



The results from each of the approaches were relatively similar with little disparity and were combined and weighted to derive an estimated fair market value for the Company.  Equal weightings were assigned to each of the four approaches.  The weighted average of the four approaches resulted in a fair market value approximately 23% higher than net book value at September 30, 2016.



Each of the valuation techniques used by the Company requires significant assumptions.  Depending upon the specific approach, assumptions are made concerning the economic environment, expected net interest margins, growth rates, discount rates for cash flows, control premiums, price-to-earnings multiples, and price-to-book multiples. Also, assumptions are made to determine the appropriate individual weighting to be used for each approach in determining the fair market value.  Changes to any one of these assumptions could result in significantly different results. 



Accounting for Retirement Benefits



Management makes a variety of assumptions in applying principles that govern the accounting for benefits under the Company’s defined benefit pension plans and other postretirement benefit plans. These assumptions are essential to the actuarial valuation that determines the amounts recognized and certain disclosures it makes in the consolidated financial statements related to the operation of these plans. Two of the more significant assumptions concern the expected long-term rate of return on plan assets and the rate needed to discount projected benefits to their present value. Changes in these assumptions impact the cost of retirement benefits recognized in net income and comprehensive income. Certain assumptions are closely tied to current conditions and are generally revised at each measurement date. For example, the discount rate is reset annually with reference to market yields on high quality fixed-income investments. Other assumptions, such as the rate of return on assets, are determined, in part, with reference to historical and expected conditions over time and are not as susceptible to frequent revision. Holding other factors constant, the cost of retirement benefits will move opposite to changes in either the discount rate or the rate of return on assets. “Item 8. Financial Statements and Supplementary Data—Note 15” provides further discussion on the accounting for Hancock’s retirement and employee benefit plans and the estimates used in determining the actuarial present value of the benefit obligations and the net periodic benefit expense.



 

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RECENT ACCOUNTING PRONOUNCEMENTS



See Note 1 to our consolidated financial statements that appears in “Item 8. Financial Statements and Supplementary Data.”



 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The information required for this item is included in the section entitled “Asset/Liability Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that appears in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is incorporated here by reference.



 

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ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The Company’s unaudited quarterly results for 2016 and 2015 are presented below.



Summary of Quarterly Results

(Unaudited)









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Summary of Quarterly Results (continued)

(Unaudited)







 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



The management of Hancock Holding Company has prepared the consolidated financial statements and other information in our Annual Report in accordance with accounting principles generally accepted in the United States of America and is responsible for its accuracy. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.

In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system.



The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Rule 13(a)–15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management also conducted an assessment of requirements pertaining to Section 112 of the Federal Deposit Insurance Corporation Improvement Act. This section relates to management’s evaluation of internal control over financial reporting, including controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) and in compliance with laws and regulations. Our evaluation included a review of the documentation of controls, evaluations of the design of the internal control system and tests of the effectiveness of internal controls.



The Company’s internal control over financial reporting as of December 31, 2016 was audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their accompanying report which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.  



Based on the Company’s evaluation under the framework in Internal Control – Integrated Framework (2013), management concluded that internal control over financial reporting was effective as of December 31, 2016.  





















 

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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders

of Hancock Holding Company:



In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Hancock Holding Company and its subsidiaries as of December 31, 2016 and December 31, 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.



A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Management's assessment and our audit of Hancock Holding Company's internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





/s/PricewaterhouseCoopers LLP



New Orleans, Louisiana



February 24, 2017 



















 

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Hancock Holding Company and Subsidiaries

Consolidated Balance Sheets

 





See accompanying notes to consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Income







See accompanying notes to consolidated financial statements.  

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Comprehensive Income







See accompanying notes to consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity







See accompanying notes to consolidated financial statements.

 

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Hancock Holding Company and Subsidiaries

Consolidated Statements of Cash Flows









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Hancock Holding Company and Subsidiaries

Consolidated Statements of Cash Flows—(Continued)







See accompanying notes to consolidated financial statements.